Not a Pretty Picture

Going bankrupt is hard enough. But if you have big pension liabilities, it’s even harder.

One company trying to find its way out of bankruptcy is Eastman Kodak. However, one of the hurdles standing in the way has been Kodak’s British pension plan, which until recently had a $2.8 billion claim against the company. Now the parties have reached an agreement, and Kodak has agreed to sell to its U.K. pension fund two of its businesses for $650 million. Goodbye, document imaging and personalized imaging operations. Goodbye, U.K. pension obligations, as well.

“In the coming months, the U.K. retirees, about 15,000 total, plan to establish a governance structure and hire executives to try to generate cash flows” large enough to meet the company’s original promises, The Wall Street Journal reported this week. Meanwhile, the paper noted, “Kodak’s U.S. pension obligations are still being sorted out in bankruptcy court with the Pension Benefit Guaranty Corp.”

In the view of Peter Drucker, if Kodak made any mistake, it was in offering guaranteed pensions in the first place. As we’ve noted, Drucker wrote an article in 1950 for Harper’s Magazine (and republished in the Toledo Blade) called “The Mirage of Pensions,” and it argued precisely against the kinds of pension commitments that have tangled up companies like Kodak and General Motors. In Drucker’s view, maintaining pension obligations when a business went bad made no sense, and, he wrote, “there are very few businesses that could stand the strain without going bankrupt.”

No worker should find a pension plan reassuring, Drucker believed, for no business lasts forever. “For such a plan to give real security, the financial strength of the company and its economic success must be reasonably secure for the next 40 years,” Drucker warned in his essay. “But is there any one company or any one industry whose future can be predicted with certainty for even 10 years ahead?”

Of course, Drucker’s warnings went generally unheeded. Years later, in his memoir Adventures of a Bystander, Drucker penned an extended ITYS about the warning he’d given in 1950, when the social contract between employer and employee seemed sacrosanct. “All of my arguments have, I submit, been proven right . . . but irrelevant,” he wrote. “By now the United States has 500,000 private pension plans. They have all the problems I anticipated.”

How secure is your pension—and, if you think it’s shaky, what are you doing about it?