AUSWR
The Association of U S West Retirees
 

 

 

Congress 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 defined-benefit plans.

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 employees.

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 executives.

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 Schroeder at mike.schroeder@wsj.com

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