
Companies controlled by PE firms use bankruptcy to shed pension obligations - kaboro
https://www.washingtonpost.com/business/economy/as-a-grocery-chain-is-dismantled-investors-recover-their-money-worker-pensions-are-short-millions/2018/12/28/ea22e398-0a0e-11e9-85b6-41c0fe0c5b8f_story.html
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thinkr42
I worked at Marsh from 2005-2015 in both corporate and the store. We were
always skeptical of Sun, the CEOs that would cycle through didn't grasp the
basics of grocery, and as an organization we failed to invest in basic
infrastructure that would reduce our overall costs which are huge in the 2%
margin grocery business.

At the store we had registers with an OS from the 80's, a common thing if you
look around, but we never invested in developing anything beyond the 80's
unlike our competitors. We didn't ever implement a JIT style logistics
program, which with massive in store staff cuts led to poor merchandise orders
which in a perishable business kills you. Management in general was _highly_
skeptical of new technology and prone to spending a bunch of labor hours on
repetitive, easily automated tasks (by my accounting at the time, I could have
automated more than a million dollars of labor costs with a week of effort -
something I brought up with management and demonstrated but was ultimately
shot down, I wasn't some super genius - we had folks literally copying and
pasting for 8 hours a day).

Marsh was a good company with good people, several of those in the article I
knew from my time in corporate. We had folks that would kill themselves
working 60 hour weeks to keep a store afloat. It sucks to see what had
happened to them.

~~~
sct202
I wonder how much of that was politicking, where someone was keeping something
purposefully bad so that they could sell a solution that "saves so much money"
when a far cheaper solution would save as much money and cost way less.

~~~
Spooky23
Sometimes companies maintain high friction/high cost crap like that to scare
off acquisition.

A friend worked for a regional bank that had a strategy of purposeful
obsolescence to maintain control with the core shareholders, who were mostly
from one family. They were using 1980s era AS/400 systems with terminals as
late as 2008, and had only 1 PC assigned to a manager in the branches, with
connectivity via ISDN.

~~~
thinkr42
I hadn't thought of this to be honest, but I do faintly remember the IT / Dev
team using the "not technically feasible" line a bunch whenever Marketing
would come through with stuff. Used to get me angry quite a bit and I saw it
translate a bunch to lost revenue and increased costs.

I don't know how much of this got sent out of Marsh and up to Sun though.

~~~
Spooky23
Lazy IT people are always a good excuse too. Especially in CFO driven IT
shops.

I've seen people waste millions on magical systems that did very little out of
inertia. In one case, a system with something $10M in annual costs that
managed terminal (as in VT-102 terminal) and line printer assignments. A
decade after the printers were trashed and terminals moved to a (almost
equally offensive) very expensive web-based system.

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raheemm
_When Sun bought Marsh Supermarkets, the company had three retirement plans.
One for the top five Marsh executives, one for the store employees, and one
for the warehouse workers.

Only the executives’ plan, however, was fully funded under the sales
agreement: With the completion of Sun’s purchase, Marsh’s top five executives
were to be awarded $14 million in retirement payments, according to company
financial documents. Among them: CEO Don Marsh at $7 million and corporate
counsel P. Lawrence Butt at $2.2 million.

Meanwhile, the other two retirement plans — the worker pensions — were short
millions of dollars._

------
bedhead
Pensions get abused because they can be. (I'll limit this to public pensions)

When a municipality issues a bond, that bond has an indenture which is a
contract. It has a very specific set of rules about what the municipality can
and cannot do (covenants) and a very specific schedule for when and how the
money must be paid back. Try skipping an interest payment and all the sudden
you instantly find that there are _serious_ consequences, like you find
yourself in court, or threatened with involuntary bankruptcy, and your credit
rating goes down, etc.

When a person obtains a mortgage, they too sign a contract specifying things
they must do (eg get insurance) and a schedule for repaying principal and
interest. Try skipping a month or two of payments and the bank starts calling,
it affects your credit, and maybe you lose your house one day if you keep not
paying.

But pensions have nothing like this...it's almost the reverse set of
incentives. There's virtually no enforcement of prudent management. The
Chicago teacher's pension fund skipped making contributions for a _decade_ in
what they euphemistically called "pension holidays". Instead, the money got
diverted mostly to higher salaries. The people who ran the city were actually
rewarded for this malfeasance. And that's in addition to routinely
underestimating critically important assumptions such as healthcare costs,
lifespan, investment returns, and interest rates, which are hard enough as it
is. The problems take multiple election cycles to manifest, and it creates a
massive moral hazard. You couldn't design a more toxic form of IOU if you
tried...I've long argued that public pensions should be illegal.

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lefstathiou
To me the bigger culprit is the unfunded pension as a tool of retirement
planning. Unfunded pensions are failing or on the brink of failing almost
everywhere they are tried. It's a huge scandal and deeply immoral IMO. I read
the other day that NYC alone has over $100bn in unfunded pension liabilities.
There is simply no budget to pay that down. Unfunded pensions taking down
numerous economies in Europe.

There is a county in Georgia (Sandy Springs) that effectively went private.
Rather than offering a state pension to their employees (other than ones they
were legally required to), they calculated the value of the pension
contribution they would make and simply tacked it on to employee salaries. I
personally think this is a good approach (with some room for incentives that
help protect people from themselves).

Note: not trying to mount a defense of PE - often people ask what is the
purpose/role or value of PE in society. In a somewhat perverted sense, this is
it. There are not many mechanisms that can almost instantly re-habilitate an
enterprise that was mismanaged or made severely consequential long term false
promises to employees. The alternative is a slow, timely and painful decline
similar to Sears or Kmart and rather than this article we'd be reading
articles about the towns that Marsh left behind.

~~~
fatbird
Why isn't it a solution to simply require pension funds to be fully funded,
perhaps under a separate legal entity that's protected from raiding by PE
firms?

Why is it that the "unfunded pension" crisis always makes people question the
second term in the phrase instead of the first?

~~~
RestlessMind
Why? I can think of multiple reasons.

Some essentially boil down to human nature - short-term thinking, preferring
politicians who make rosier promises ("assume high rate of return on pension
investments and lower the taxes") against honest politicians ("increase taxes
since current levels are unfunded"), etc

Some are about societal changes no one can honestly predict - avg lifespans
increasing (avg life expectancy in the US was 61 when social security was
enacted), pensions were promised in 70's / 80's before globalization wave hit
forcing Western companies to either die or compete with leaner overseas firms,
internet and e-commerce bringing b&m retail apocalypse, etc.

To find out true cost of funding a pension, try buying an annuity for the
similar level of monetary coverage where seller has to do more due diligence.
And that will show you the true cost, and my guess is that there is very
little appetite to bear that cost in our society.

~~~
grogenaut
I imagine it’s a lot like any other cash flow issue. It’s in no ones best
interest to halt the company the instant it can’t meet its obligations by $1.
You get a loan instead. But when do you halt the company?

~~~
RestlessMind
Why not go the free-ish market route (with politically acceptable regulations
like creditor protections) and let the owners decide how/when to halt the
company?

~~~
grogenaut
The answer seems to be never halt the company in most cases, just split it up
and write off parts. When did yahoo end?

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nradov
Defined benefit pension plans create a huge moral hazard and are just too
risky for employees, employers, and taxpayers alike. As a society we should be
aggressively phasing out pensions and replacing them with defined contribution
plans like 401(k) and 403(b). That way each employee's retirement funds are in
an individual named account held by a brokerage and can't be taken away. Even
if your employer goes bankrupt, everything already deposited in your account
is still yours.

~~~
rileymat2
No.

The real risk is not in the present, the real risk is outliving your
retirement savings.

You can predict how long a population will live, you cannot predict whether a
single person will need 5 or 40 years of retirement savings. Collective
defined benefit plans mitigate this risk and are the only thing that really
make sense.

They also end up cheaper because instead of each person needing to save the
amount needed until the end of retirement, the group only needs to save the
amount that the average person will need.

~~~
tome
In the UK you can buy an annuity with the proceeds of your pension fund at
retirement. Is the same not true of a 401(k) in the US?

~~~
AlexTWithBeard
There's always a risk an annuity provider will go bust.

~~~
jnwatson
There's also a risk of a meteor hitting the earth. The likelihood is very low.

------
olliej
Still amazing to me that owners and equity firms get money before pension
funds. The literal theft - a pension is part of your income, and being able to
sell off a company without paying off pension debts literally means
retroactively stealing wages from workers.

Remember that banks, etc all have insurance on their debt, apparently that
doesn’t matter - companies are simply stealing from money that is not theirs,
and that’s apparently ok.

~~~
bsbechtel
The government does the same thing with SS. If you pass away before collecting
benefits, those benefits aren't passed on to those who inherit your estate.

~~~
kenmicklas
That's not wage theft though. You can't be paid after you're dead. Inheritance
is just legalized aristocracy.

~~~
madengr
So you are supposed to just give your estate to the government? Fuck that.

~~~
kenmicklas
Why not? Then the wealth can be distributed to everyone fairly. Having this
safety net available for everyone and not just the rich would reduce the need
for wealth hoarding in the first place. Your ideology has no justification
besides your own particular interest in the class position of your offspring.

~~~
aswanson
Because I want my children to benefit and build on my life's efforts.

~~~
kenmicklas
And I don't want you to be able to do that. If this is supposed to be a
rational position you're going to need more justification than "you want it".

~~~
bsbechtel
That's a truly horrendous position you've taken. You're arguing that it is
somehow rational to not want a child to benefit from his or her caretakers.
The only logical conclusion from this is why stop at death? Why don't we make
it so it's illegal for a parent to take any action that provides any sort of
benefit for their children, and all children are dependent upon the state from
birth, with all adults paying a mandatory 'childcare' tax. This way all
children can start out life on 100% equal footing, and also without any
opportunity to experience what a parent's love and sacrifice really is. What a
dystopian future you desire.

~~~
kenmicklas
Actually, we live in quite a dystopian reality. Your only argument is a
slippery slope fallacy. I never said that a child should not benefit from
their caretakers. Only that they should not inherit economic wealth which they
did not produce.

~~~
bsbechtel
So explain what's the tangible difference between receiving benefits while the
parent is alive and after they're dead? Either way the child is inheriting
economic wealth they didn't produce, which shines a light on the
horrendousness of your argument.

~~~
kenmicklas
Instead of calling my argument horrendous with no justification, maybe you
could try engaging with it. I, too, would like to just call you a right-wing
libertarian nutjob or something like that and move on with life, but hopefully
something better can happen. :)

> Either way the child is inheriting economic wealth they didn't produce

There isn't a whole lot. But you're missing the point of parenting. Hint: it's
not financial support. You can't write a baby a check for $1M, plop it down in
an empty house and expect it to live a good life. After you die you're not
doing any of the stuff that actually makes having a parent valuable to a child
relative to receiving the necessary financial support (which will not even be
available to working class children under your proposed system).

Maybe if you were confident your children would be adequately taken care of if
you died, you wouldn't have to work so hard saving up a nest egg and would
actually have more time to be a parent.

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kokokokoko
Sometimes I look back and wonder if this last 30+ years of PE firms
consolidating and eating up all of these mid sized companies is actually the
reason things haved trended towards very large corporations. As opposed to
economies of scale etc. A large market cap is probably the best defense a
company has against being bought out. It's almost like being a giant whale in
the ocean as opposed to a fish.

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pm24601
As a natural person, our interest payments are NOT tax deductible.

Corporations get to deduct interest costs from their taxes. So PE firms are
incentivized to load up the firms they attack with debt.

Additionally, PE firms are allowed to use a firm's own money as collateral for
the loan used to take over the firm. This includes the pension funds.

So any public firm responsibly run is subject to attack. Its almost
irresponsible for a firm to fund the pension fund as it will be used against
the firm.

The solution:

1\. Require that any loan be based on the assets currently controlled by the
PE firm.

2\. Eliminate tax deduction for debts that are not directly tied to capital
purchases.

~~~
corebit
Or just let the market move away from pensions entirely, like any sane, moral
person would choose.

------
cityzen
Just another illustration that the "America" you learned about is not the
America™ we live in. As a parent I find it more and more difficult to try to
teach my kids the reality of America without sounding like a conspiracy theory
nut job. I do not want my kids growing up with blindly trusting that any
institution (schools, corporations, government, etc.) have their best
interests in mind. In a way I feel like selling them the "dream" is much less
painful but I would feel like I failed as a parent to not warn my kids of the
realities of the world.

~~~
stevenwoo
The two most depressing books I have read recently are A People's History of
the United States and Lies My Teacher Told Me and I wish I had read them when
I was a child but YMMV.

~~~
tome
Hopefully the fourth paragraph of the Wikipedia article will help you feel
less depressed, since

"A People's History of the United States has been criticized heavily by
historians from across the political spectrum. Critics assert blatant
omissions of important historical episodes, uncritical reliance on biased
sources, and systematic failures to examine opposing views."

[https://en.wikipedia.org/wiki/A_People%27s_History_of_the_Un...](https://en.wikipedia.org/wiki/A_People%27s_History_of_the_United_States)

~~~
stevenwoo
There is a late chapter where the author has a full throated call for what
sounds like community socialism as practiced by Jesus and in my opinion the
book is worse for it but the excerpts from the interviews he did in the latest
editions and separate book make up for it, also I appreciated the alternative
sides that were fighting on all sorts of political issues that lost even if
they are seen as biased because the it's natural for either side in a conflict
- it's interesting because I'm old enough to have been taught the Columbus and
Pilgrams as beneficient travelers tale even up to high school, and the native
American experience/side is pretty inadequately covered by most all media.

------
curtis
Companies should never be responsible for managing the retirement savings of
their employees. I can't imagine that this every made any sense, but it's an
idea that comes from an era when there were a lot of big stable companies that
people believed would be profitable for an entire lifetime. We've now seen
ample evidence that such companies are really unusual.

------
nickthemagicman
Its a shame that pensioneers are so low on the bankruptcy list.

The banks of America's and Lehman bros get their money before the people who
are working the business to survive do.

Without basic income you need a job to survive but at the same time you're
being exploited while you work that job.

~~~
bryanlarsen
In Canada, pensions are close to the top of who gets paid out in bankruptcy.
Doesn't help a lot, they just sell off all the pieces and pay off insiders
before entering bankruptcy.

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pjc50
This kind of thing is horribly common in declining firms - a last minute
attempt to asset-strip everything of value and transfer it out of the
corporate entity, which can then go bankrupt, stiffing creditors and
employees.

See also Radio Shack, Toys R Us, Maplin, and British Home Stores:
[https://www.theguardian.com/business/2017/feb/28/philip-
gree...](https://www.theguardian.com/business/2017/feb/28/philip-green-agrees-
pay-363m-bhs-pension-fund)

(The astonishing thing there is that somehow the thief was shamed into
returning the money.)

~~~
soared
Newspaper are an excellent example as well.

[https://www.bloomberg.com/opinion/articles/2018-03-26/alden-...](https://www.bloomberg.com/opinion/articles/2018-03-26/alden-
global-capital-s-business-model-destroys-newspapers-for-little-gain)

------
1001101
Oliver Stone's Wall Street was not an instruction manual.

~~~
rchaud
Neither was Liar's Poker, yet Michael Lewis has repeatedly commented that
people saw it as something to aspire to. The same occurred with the glorified
story of Jordan Belfort. Or Patrick Bateman (that one was of course
fictional).

What is it about our society that makes people oblivious to satire/cautionary
tales as long as it's given a shiny cosmetic sheen?

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AdamM12
On some levels the government insuring pensions like this creates an economic
incentive to do exactly what these guys are doing.

~~~
sct202
Government pensions aren't insured like this and also have widespread issues
with leaders coming in an slashing contributions so that they can spend the
money elsewhere; eg, Illinois on every level of government. The insurance at
least protects the pensioners to some degree.

~~~
AdamM12
Reread the article and what I said. The government insures some private
pensions, not public pensions. This insurance provides some economic incentive
for PE firms and other managers to behave in the manner derided in the
article. All I was stating.

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n-exploit
How is there not a government institution established to investigate fraud
such as this?

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moltar
That’s why nobody shall rely on pension plan. Ya a scam. Just take the money
and invest on your own terms.

~~~
stevenwoo
Off the top of my head, what is the difference between these pensions and a.)
public employee pensions like state/county/municipal employees or
police/fireman pensions at full pay of last year of service b.) military
retirement at half pay after 20 years of service? Those seem like a really
good deal for the retiree ( that also look unsustainable in some areas for a.)
at least)

~~~
moltar
I don’t know exactly how it works in all areas to be honest. But if there’s a
pension deduction, and one is able to withhold it and invest on their own, I
think it should be the default choice.

Military is a whole different story. They need to incentivize people somehow
and it ain’t going to be ping pong tables and beer fridge.

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mud_dauber
There's a special place in hell for private equity firms. Go ahead & downvote
me. You're not changing my opinion.

