Seeks to Rein In Special Executive Pensions
Proposal Would Push Firms To Ensure Workers' Plans Get
Adequate Funding First
By Michael Schroeder
Staff Reporter of THE WALL STREET JOURNAL
Wednesday, January 25, 2006
WASHINGTON -- Rankled by the rich retirement payouts many
troubled companies make to executives, Congress is moving to
block such companies from funding the lavish packages.
The provision, tucked into legislation that would shore up
the federal agency that provides a safety net for
private-sector pensions, would keep financially troubled
companies from setting aside any special pension benefits
for top executives if their pension plans for rank-and-file
employees weren't adequately funded.
Disclosures about bankruptcy-proof supplemental executive
retirement benefits at some airlines, including a $45
million fund set up a few years ago for 35 top officials by
Delta Air Lines Inc., have galvanized bipartisan support for
reining in such perks at other beleaguered companies.
"We've heard too many stories of top executives of bankrupt
companies sticking workers with unfunded pensions while
running off with millions of dollars of so-called
nonqualified pension benefits," says Senate Finance
Committee Chairman Charles Grassley, an Iowa Republican.
Congress still hasn't worked out the final restrictions on
executive retirement plans, but they may kick in when a
company's defined-benefit pension plan is funded at 60% or
less of its projected liabilities.
Traditional, or defined-benefit, pension plans, in which
benefits are based on an employee's pay and years of
service, are considered underfunded if their assets fall
short of the sum they expect to pay out in the future. Such
plans have been on the decline in recent years as companies
have sought to shift more of the burden of retirement
savings to their employees, but they are still common in
highly unionized industries.
The House plans to press for language in the measure that
would block payment of new benefits to every manager covered
by a troubled company's executive retirement plan. The
Senate and the Bush administration, according to House and
Senate staff members, believe the new rule should apply only
to the company's highest-ranking executives. If a troubled
company were to go ahead and fund its executive plans
anyway, it would face stiff tax penalties.
The pension-overhaul bill that contains the measure is
expected to be sent to President Bush before mid-April. when
many companies are required to make contributions to their
For decades, executives relied on the same pension plan as
other company employees, so they had an incentive to make it
generous. The shift toward a dual system started in 1994,
when Congress passed a law intended to limit the cost to
taxpayers of runaway executive pay. The law barred companies
from taking a tax deduction on compensation in excess of $1
million a year for any current employee. The result:
Companies began setting up supplemental pension plans that
encouraged senior managers to defer compensation.
Over time, the plans added generous benefits and covered a
greater number of salaried employees. Now, more than 90% of
the largest companies offer nonqualified deferred executive
compensation plans, according to a new survey of the 1,000
largest companies by Clark Consulting, a Chicago benefits
consulting firm. Most companies have expanded the programs
to include all managers with annual salary and bonus
exceeding $150,000, benefits experts say.
Many members of Congress think the proliferation of
supplemental executive retirement plans has contributed to
the trend of companies freezing or terminating
defined-benefit pension plans. They reason that if
executives have their own rules for setting aside money,
they have less incentive to maintain nest eggs for their
Sen. Ron Wyden, an Oregon Democrat on the Finance Committee,
took Glenn Tilton, chief executive of UAL Corp.'s United
Airlines, to task at a hearing in June for striking a $4
million benefit deal when he joined the airline while other
workers were taking pay cuts. The benefit deal, Mr. Tilton
said, was designed to compensate him for benefits he would
have received from his former employer.
"The question of a double standard is very important and
resonates with people in the middle class," Mr. Wyden said.
Executive pensions have drawn greater scrutiny in the wake
of the recent spate of bankruptcy filings, which have
highlighted the practice of establishing separate retirement
plans for top executives even as rank-and-file employees
have had their wages and benefits slashed. The provision
would affect only a small percentage of the nation's 30,000
traditional pension plans, but it is designed to prevent big
companies in bankruptcy proceedings from providing generous
"nonqualified" deferred retirement packages.
These nonqualified arrangements are a kind of supplemental
executive retirement plan that isn't governed by federal
pension laws or insured by the Pension Benefit Guaranty
Corp. They are essentially corporate promises to make
payments to executives when they retire or leave the
company. In bankruptcy proceedings they generally are beyond
the reach of corporate creditors because they are structured
as trusts in the names of the covered executives. But if an
executive gets these benefits earlier than tax laws permit,
he is hit with a tax bill and penalty.
Delta said its trusts were designed to protect the pensions
of top executives, including some who have already left the
company. By the time Delta filed for bankruptcy protection
in September, about 25 of the covered executives, including
the airlines' chief Washington lobbyist, D. Scott Yohe, had
retired in order to tap lump-sum payments. Mr. Yohe was
immediately hired back under a consulting agreement and
continues to lobby Congress for breaks for airlines in
federal pension legislation.
Delta's plan isn't the only one that has caused controversy.
Donald Carty, former chief executive of AMR Corp.'s American
Airlines, lost his job in 2003 after an uproar over
retention bonuses and supplemental pension benefits for
executives that weren't disclosed until after the airline's
employees had agreed to large pay cuts.
Business and benefits experts warn, however, that
restrictions on executive retirement plans could have an
unintended effect: They could prompt management to cancel
defined-benefit plans altogether. That's because there would
be nothing to stop companies that didn't have
defined-benefit plans from paying into special plans for
The restrictions sound "like a nice flag-waving provision
that's good for the little guy. But it's another reason for
a company not to have a defined-benefit plan," said John
McFadden, a professor of taxation and pensions at the
American College, a suburban Philadelphia school that
educates insurance and financial-services professionals.
Companies and business trade groups aren't actively lobbying
to kill the executive-pension language in the bill, at least
partly because they haven't been focused on the obscure
provision. Executive compensation "is such a sensitive
topic. Lobbying it seems self-serving," said Lynn Dudley,
vice president for retirement policy at the American
Benefits Council, which represents large employers.
Write to Michael