In a June 20th letter from the Aircraft Mechanics Fraternal Association (“AMFA”), a union representing 16,000 airline ground workers, to U.S. Secretary of Labor Elaine Chao and Bradley Belt, executive director of the Pension Benefit Guaranty Corporation (“PBGC”), AMFA requested that the PBGC conduct a forensic audit of the pension plans of bankrupt United, a subsidiary of UAL. While the PBGC has taken over the pension plans of many bankrupt corporations in the past, the April estimated $6.6 billion bailout of the United plans is the largest in history. Participants in these plans and labor unions representing these participants have been struggling to find means of protecting their interests as the corporation and government agencies with jurisdiction over its pensions privately negotiate the terms under which United will be permitted to walk away from its pension obligations.
As we wrote last month, we were astounded to learn from the Department of Labor and the PBGC that neither of these agencies has ever conducted a forensic review of any terminated plans to determine whether the sponsors or any vendors to the plans may have engaged in wrongdoing. Under current procedures, when the government and the taxpayers assume the burden of the unfulfilled pension obligations of America’s corporations, any party that may have contributed to the demise of these funds is freed of any risk regarding potential liability for past malfeasance. Everyone involved with the pension, i.e., deep-pocketed Wall Street investment firms as well as the bankrupt corporate sponsor, can rest assured that there will be no final day of reckoning. So to analogize to common wisdom among personal injury lawyers: if you’re going to harm a pension, best to kill it altogether.
As O.V. Delle-Femine, AMFA’s national director stated in the June letter below, “The PBGC and responsible plan fiduciaries should, as a matter of course, undertake forensic audits of any distressed plans in order to determine whether any of the parties providing financial services to the plans may have contributed to their demise.” Indeed, with respect to the United plans, there was an obvious conflict of interest involving the consultant to the plans also serving as an investment manager to at least one plan. Consultant conflicts of interest have recently surfaced as a concern shared by both the Securities and Exchange Commission and the DOL. These agencies have advised pension boards to thoroughly investigate conflicts related to consultants that are involved in the brokerage and money management businesses, in addition to providing objective advice to plan sponsors.
We applaud AMFA's action. This is the first example we have seen of a union effectively entering into the debate surrounding the fate of the nation’s ailing defined benefit plans. Strikes and other tactics that may have worked for unions in the past have no place here. Every union should seek to identify initiatives that will go to the heart of the problem. And “the problem” is: if corporations cannot or will not honor their pension promises, what procedures should be followed in letting them off the hook? AMFA has correctly concluded that forensic audits can be a significant part of the solution.
Who can argue that before taxpayers assume the obligations of corporations that have mismanaged their pensions (let us not forget these are companies that made promises to their employees they later decided they could not keep—that’s mismanagement!) a forensic audit should be undertaken to ensure there has been no wrongdoing? If a recovery is available from parties that have harmed a fund, those parties should be made to pay before the taxpayers contribute one cent. Republican fiscal conservatives, as well as union-friendly Democrats should agree that sound public policy mandates forensic audits.
Furthermore, what is the likely effect of requiring forensic audits before corporations are allowed to dump their pensions? Do you think corporations will be more or less likely to choose to dump, knowing there will be a final forensic review? We think the answer is obvious.
AMFA subsequently sent a letter requesting a forensic audit of the distressed Northwest pension. We await a response to both letters from the various parties and understand that a draft response is circulating within the PBGC at this time.
The Ohio Bureau of Workers Compensation Scandal
However, our position is even broader than that enunciated by AMFA in its letter. We believe that all pensions, whether they appear to be distressed or not, should regularly conduct forensic audits of their operations in order to ferret out conflicts of interest, undisclosed financial arrangements and malfeasance. In our experience, many plans in apparent good health and plans that believe they are trouble-free, have lurking problems. For example, from 2001 through 2005, we annually offered to undertake reviews of consultants, money managers and other parties providing services to the Ohio Bureau of Workers Compensation. Each year we were told there were no matters officials at the fund wished to have reviewed—not even those specific instances of wrongdoing we brought to the fund’s attention. A few of the many problems of the fund have begun surfacing recently; many of the fund’s losses that are being uncovered today could have been avoided had the fund been receptive to regular forensic reviews as a matter of “good house-keeping.” We hope that despite the politically charged atmosphere surrounding the fund at this time, a full forensic investigation will eventually be undertaken. The public deserves to know the depths of the wrongdoing and the better the understanding of past mistakes, the greater the likelihood that they will not be repeated. In our experience we have found that funds that fail to fully investigate wrongdoing are doomed to repeat their mistakes. For example, funds with wirehouse brokers posing as consultants often fire these conflicted consultants (and sometimes even bring lawsuits alleging wrongdoing) but then replace them with other equally conflicted wirehouse broker-consultants.
Should regular forensic audits become the rule, vendors to all pensions will be forced to clean up their act. In summary, regular forensic audits will impose discipline upon corporate sponsors of, as well as vendors to, pensions.
Secrets of the DOL and PBGC
While the DOL and PBGC exert tremendous influence over the more than 34 million workers and retirees in over 29,000 single-employer defined benefit plans, in many respects these two agencies operate in secrecy. Even finding someone knowledgeable at either agency to answer a telephone inquiry is difficult, to say the least. These agencies must improve their transparency, accountability and responsiveness. They often seem to hold in contempt participants in distressed funds that are seeking information regarding their endangered retirement assets, as well as a voice in determining how these assets are handled. Given that workers’ lifetime savings can be erased by the agreements these agencies make with employer corporations, less secrecy and greater responsiveness to the concerns of participants should be demonstrated. These agencies need to be reminded that they often are destroying the retirement dreams of workers, as they allow the nation’s corporations to escape responsibility for promises made.
The procedures and rules these agencies follow in handling distressed plans are shrouded in secrecy. As we observed last month, a handful of private firms, staffed primarily by former DOL employees, appear to be routinely selected to serve as independent fiduciaries to distressed pensions. Are they hired through a competitive bidding process? We’d like to see a list of all the independent fiduciaries ever hired by or with the consent of the DOL and PBGC. Do the same firms turn up time and again?
Who are these firms, how are they hired, how much do they get paid and what are their duties? We would like to see the letters of engagement or contracts detailing the duties of these firms. Are they truly independent firms or are they related to financial services companies? Do they manage money and serve as investment consultants to pensions as well? What conflicts are these firms subject to? Are they charged with responsibility for investigating possible past wrongdoing? Can they ignore ongoing conflicts of interest possibly causing ongoing harm? Do these firms have expertise regarding the management of pension assets or are they merely versed in applicable law? These are questions the participants in distressed pensions, as well as the general public, deserve to have answered.
We are aware of numerous instances of questionable dealings occurring under the watch of independent fiduciaries. It is clear to us that independent fiduciaries often fail to detect corrupt industry practices and may even be parties to such wrongdoing. It is not surprising that independent fiduciaries may be engaged in unsavory industry practices since often these firms are owned, controlled or have business relationships with parties involved in financial services that regularly engage in wrongdoing.
The Employee Retirement Income Security Act of 1974 was written to protect participants in pensions. Instead it has become a labyrinth that participants cannot possibly comprehend. Corporations, on the other hand, can afford to hire legal experts to navigate them through the statute to achieve their desired objectives. Finally, a limited number of DOL and PBGC former insiders have profited handsomely from landing contracts with corporations wherein they are retained to supposedly protect the interests of pension participants from the very corporate plan sponsors that retain them. It’s absurd and this mess must be cleaned up immediately, given the likelihood that the number of plans the PBGC will take over in the not-too-distant future will mushroom.
Aircraft Mechanics Fraternal Association Administration Office: 67 Water Street, Suite 208A • Laconia, NH 03246 Tel: (603) 527-9212 • Fax: (603) 527-9151
June 20, 2005 Ms. Elaine Chao Secretary of Labor Chairperson, PBGC Board of Directors U.S. Department of Labor Frances Perkins Building 200 Constitution Avenue, NW Washington, DC 20210
Mr. Bradley D. Belt Executive Director Pension Benefit Guarantee Corporation 1200 K Street, NW Washington, DC 20005-4026
RE: United Airlines’ Pension Plan
Dear Secretary Chao and Director Belt:
The PBGC and its plan termination insurance are increasingly called upon to protect and pay the pension obligations promised by large, troubled corporations. The PBGC and responsible plan fiduciaries should, as a matter of course, undertake forensic audits of any distressed plans in order to determine whether any of the parties providing financial services to the plans may have contributed to their demise. Unfortunately at this time forensic audits of pensions virtually never are undertaken and wrongdoing related to pension failures has gone undetected.
As you are aware, an investigation into the pension consulting industry by the Securities and Commission was conducted. The conclusion of these agencies was that business alliances among pension consultants and money managers can give rise to serious potential conflicts of interest that, at a minimum, need to be monitored and disclosed to plan fiduciaries. The Securities Exchange Commission Staff report raised serious questions about whether some pension consultants are fully disclosing potential conflicts of interest that may affect the objectivity of the advice given to their pension plan clients. The implication is that tainted advice may cause avoidable losses or pension under-performance.
It has also been reported that private fraud investigators have uncovered instances where banks custodying pension assets have had undisclosed financial arrangements with money managers handling plan assets.
All of the above referenced revelations are troubling and should be investigated. While the plan sponsor may be bankrupt, the parties that have been dealing with the plan are not and it may be possible to recover assets from these parties on behalf of the plan's participants.
“The Employee Retirement Income Security Act (ERISA). ERISA sets standards of conduct for those who manage an employee benefit plan and its assets (called fiduciaries). Fiduciaries have important responsibilities and are subject to standards of conduct because they act on behalf of participants in a retirement plan and their beneficiaries. These responsibilities include: (a) acting solely in the interest of plan participants and their beneficiaries and with the exclusive purpose of providing benefits to them; (b) carrying out their duties prudently; (d) following the plan documents (unless inconsistent with ERISA); (e) diversifying plan investments; and paying only reasonable plan expenses. ERISA § 404, 29 U.S.C. § 1104.”
“A fiduciary who breaches any of the responsibilities, obligations or duties imposed upon fiduciaries by ERISA is personally liable to make good to the plan any losses resulting to the plan, and to restore to the plan any profits of the fiduciary which were made through use of plan assets by the fiduciary. ERISA § 409, 29 U.S.C. § 1109.” A plan participant may bring an action for appropriate relief under ERISA § 409, to enjoin any act or practice which violates ERISA or the terms of the plan, and to obtain appropriate equitable relief to redress such violations or to enforce any terms of ERISA or the plan. ERISA § 502(a)(2) & (3), 29 U.S.C. § 1132(a)(2) & (3).
Under the ERISA regulations referenced in the above paragraphs and on behalf of our AMFA/United Airlines and AMFA/Northwest Airlines represented membership, we are requesting that the PBGC conduct a forensic audit on the plans and are seeking an initial review of the plan for any potential conflicts of interest in this matter. We would like to meet with you to discuss this matter and how you would like to proceed.
We await your reply.
Sincerely,
O.V. Delle-Femine National Director
cc: Members of the Senate Finance Committee Members of the House Committee on Education and the Workforce AMFA NEC AMFA Legal AMFA Legislative AMFA Economic AMFA Pension Actuary AMFA/UAL and AMFA/NWA Members Glenn Tilton, President & CEO, United Airlines
UAL Union Asks For Pension Probe Neil Weinberg, 06.22.05, 6:15 AM ET
By Author Neil Weinberg Forbes Magazine
NEW YORK - A union representing 16,000 airline ground workers is calling on the U.S. government to investigate possible wrongdoing in the management of United Airlines' pension fund.
The request came in a June 20 letter from the Aircraft Mechanics Fraternal Association to U.S. Secretary of Labor Elaine Chao and Bradley Belt, executive director of the Pension Benefit Guarantee Corp., the government body charged with taking over insolvent private pension plans--which has never conducted a forensic audit of any of the plans it has taken over.
The PBGC agreed to take over the pension plans of bankrupt United, a subsidiary of UAL (otc: UALAQ - news - people ), in April as part of an estimated $6.6 billion bailout, the largest in history. United said at the time it was compelled to shed its pensions to craft a workable bankruptcy exit plan.
"The PBGC and its plan termination insurance are increasingly called upon to protect and pay the pension obligations promised by large, troubled corporations," O.V. Delle-Femine, the union's national director, said in the letter. "The PBGC and responsible plan fiduciaries should, as a matter of course, undertake forensic audits of any distressed plans in order to determine whether any of the parties providing financial services to the plans may have contributed to their demise."
Delle-Femine said that's rarely done. "Unfortunately, at this time, forensic audits of pensions virtually never are undertaken and wrongdoing related to pension failures has gone undetected," he said.
Its legislative liaison, Maryanne DeMarco, said the union was not aware of specific wrongdoing in the management of United's pension funds. However, she noted that a U.S. Securities and Exchange Commission report released last month (see "SEC Targets Pensions") indicated widespread conflicts of interest exist among pension consultants and money managers that may cause significant financial damage to pension funds.
"We take these issues seriously. As part of our due diligence, we ensure upfront that all of our advisers have no conflicts. United has always operated our plans in the best interests of our participants and beneficiaries, and believe our advisers act similarly," UAL said in a written statement in response to our query.
United lists Russell Investment Group as its chief pension consultant. Russell is also listed as investing money for United via alliances with other money managers. The company did not respond to a request for comment. Russell's wide-ranging operations appear to be of the sort the SEC has called on plan overseers to investigate carefully.
"They are a huge broker, a money manager and supposedly provided objective advice to [United's pension fund], the largest pension failure in history," said Edward Siedle of Benchmark Financial Services, a firm that investigates possible wrongdoing among money managers and was consulted by United's union. "If that doesn't merit an investigation, I don't know what does."
Following the savings and loan crisis, the Resolution Trust Corp. conducted forensic audits and barred firms found to have misbehaved from further work. But lawyers for the Labor Department and PBGC have stated that they have not conducted forensic audits in the past and do not have such capabilities in-house, according to Siedle. With taxpayers now looking at bailing out potentially tens of billions of dollars in busted corporate pensions, the airline union's call for such audits may prove the first of many.
Setting Standards For The Investment Management Industry
