HoustonChronicle.com

April 24, 2002, 2:38PM

Enron utility's 'dead peasant' policies rankle

By L.M. SIXEL
Copyright 2002 Houston Chronicle

When workers at Portland General die, there's a little more money to spend on the top executives of the Enron subsidiary.

The utility has bought life insurance policies on the lives of its rank-and-file employees where the company is the beneficiary when an employee dies. That money goes for special compensation and retirement benefits for its top executives and directors.

That's a galling realization for workers, many of whom bet their retirement on Enron stock, which cratered last year as the Houston energy giant slid into bankruptcy.

The company says its use of this life insurance program is legal in Oregon and was properly disclosed to employees.

But workers sounded surprised when told about it Tuesday.

"Good God!" shouted Tim Ramsey, a 56-year-old power tester who was reached by phone in Portland.

Ramsey is one of the many workers who has sued the company after he lost $1 million in his 401(k) account because he had put most of it in Enron stock.

The fact Portland General bought such policies isn't extraordinary.

Many companies have bought corporate-owned life insurance, which is also known as "dead peasant" or "dead janitor" insurance. The nicknames reflect the fact that these policies are on low-ranking employees, rather than the top-ranking executives whose death could be a financial blow to the company.

While Texas law bans "dead peasant" coverage on most workers here, Oregon is one of the many states that allow it.

While employees said they'd never heard of the company's program, Portland General spokesman Kregg Arntson said its employees signed consent forms allowing the company to insure their lives.

That didn't make a big impression with Gary Kemper, a foreman at the company's maintenance center. When asked if he'd been told about company-owned life insurance, he said, "I don't know a thing about it."

Kemper, who lost $200,000 in his 401(k) plan when Enron stock plunged, has also sued the company seeking compensation for his retirement savings plan loss.

The Portland General fund has set aside nearly $80 million for two purposes:

· About three-quarters of the money goes for a long-term compensation plan for managers, directors and top officials.

· The rest helps pay for supplemental executive retirement payments.

This approach is used by Portland General to reward top executives with more than just their 401(k) and the traditional defined benefit pensions that are allowed by federal pension laws, which cap how much the company can contribute to the benefits.

Money from its "dead peasant" policies fund what are known as nonqualified deferred compensation plans. The advantage of these plans is that the limits on 401(k) and pension plans don't apply.

"Corporate-owned life insurance enables companies to recover the cost of nonqualified benefit plans that provide additional income and benefits to key and highly compensated employees," boasts Northwestern Mutual's Web site, which has a section promoting them.

And the cash value component of the company-owned plans -- which build up value like a whole-life insurance policy -- is an asset that can be used to offset liabilities, like promises to make enhanced executive retirement payments, according to the Travelers Life & Annuity Web site promoting them.

The company-owned life insurance, and the nonqualified compensation program, go back to the mid-1980s.

Arntson wouldn't reveal the details of the compensation packages, saying they're "internal employee matters."

The insurance policies, which are now called "Trust Owned Life Insurance," are currently in effect and also continue to cover the lives of ex-employees, he said.

Scott Simms, another Portland General spokesman, said the money was put in a trust and cannot be moved to compensate employees who lost money in their 401(k) accounts. Besides, Simms said many senior executives also suffered big losses on Enron stock.

The Internal Revenue Service has sued several companies that bought company-owned life policies, challenging their deduction of the interest cost. In each case, when the companies have sued the IRS to recover the money they had to pay in back taxes, the courts have said the insurance was a tax dodge, said Mike Myers, a lawyer with McClanahan & Clearman in Houston. He has sued Wal-Mart on behalf of Texas families seeking to collect the insurance proceeds that went to the big retailer.

But one of the companies that ran into tax trouble with the IRS is annoyed that it is lumped in with the "bad guys" when it used this life insurance strategy to fund another type of benefit plan.

American Electric Power in Columbus, Ohio, bought company-owned life insurance policies in 1990 to deal with the surging cost of medical benefits for retirees.

AEP spokesman Pat Hemlepp said the utility was faced with the choice of either eliminating the benefits or raising electric rates if it didn't use this approach. AEP has extensive properties in Texas.

Utility officials discussed the options in public meetings with representatives of the state agencies that regulate the utility, sent letters to all employees and did an article about the policies in its in-house paper.

"We were not trying to hide it," said Hemlepp.

While the policies are no longer in effect, the utility announced it would include $317 million reflecting six years of back taxes in its earnings for 2000. The company has appealed to the 6th U.S. Circuit Court of Appeals.

"Our heart was in the right place," said Hemlepp. "The employees understood what we were doing."

-- Cherri (whatever@who.cares), April 26, 2002

Answers

They're just slaves anyway, might as well get what you can for their dead bodies after you work them to death.

-- Kenny Boy (Dubya's @ partner. in crime), April 27, 2002.

Although I'm not an accountant, I can see how this practice might, under suitable interpretation of the rules, be a tax dodge or other bookkeeping trick.

The implication that Enron, Walmart et al are profiting directly from these policies doesn't hold water, because that would mean that the insurer is selling life insurance policies at a loss. This strikes me as unlikely. You can't sell at a loss and make up for it with volume, not even insurance policies.

So then, how could the insurer and the insuree BOTH make money, as a statistically predictable pattern? All I can think of is that money from insurance claims might cost the insuree the amount of the insurer's profit, but still be a less costly way of funding other desirable programs (like executive compensation) according to current tax laws. And if that's the case, Enron and Walmart and many others would be foolish NOT to take advantage of the way the current tax laws are written.

The emotional reaction I've seen to this little accounting trick is another subject, and one that utterly baffles me. I've asked those with this emotional reaction what injury they have suffered. Hell, there could be a BILLION policies out on you without your knowledge, (at least in principle) and you would STILL have absolutely no way of ever detecting this. So how are you harmed?

The response I get (minus all the name-calling) is that something is somehow related to you, however indirectly, but that whoever does so has a God-given absolute moral imperative inborn *requirement* to get your permission, if not actually cut you in on the claims even though you took no risk personally. After all, it's done in your name so you should have a say-so. And that NOT getting nothing for nothing without ever learning you didn't is *itself* the "injury".

I can understand that in the short term, the employer might cherry- pick based on knowledge the insurer lacks -- about an employee's current health, or the dangers of a particular job, in order to beat the actuarial odds. But sooner or later, the insurer will notice that Walmart or whoever is consistently beating the odds, and adjust premiums accordingly. The free market should fairly quickly ensure that Walmart/Enron is not spending on insurance policies *instead* of safety.

But beyond this, if someone is doing something I'm not aware of and CANNOT become aware of unless the information is volunteered, that does me no harm, why should I be concerned?

-- Flint (flintc@mindspring.com), April 27, 2002.

Flinter, your logic is gonna really get in the way around here.

-- Carlos (riffraff@cybertime.net), April 27, 2002.