Workers' Pensions Wither, Those for Executives Flourish
Companies Run Up Big IOUs, Mostly Obscured, to Grant Bosses
a Lucrative Benefit, The Billion-Dollar Liability
By Ellen E. Schultz and Theo Francis
Friday, June 23, 2006
To help explain its deep slump, General Motors Corp. often
cites "legacy costs," including pensions for its giant U.S.
work force. In its latest annual report, GM wrote: "Our
extensive pension and [post-employment] obligations to
retirees are a competitive disadvantage for us." Early this
year, GM announced it was ending pensions for 42,000
But there's a twist to the auto maker's pension situation:
The pension plans for its rank-and-file U.S. workers are
overstuffed with cash, containing about $9 billion more than
is needed to meet their obligations for years to come.
Another of GM's pension programs, however, saddles the
company with a liability of $1.4 billion. These pensions
are for its executives.
This is the pension squeeze companies aren't talking about:
Even as many reduce, freeze or eliminate pensions for
workers -- complaining of the costs -- their executives are
building up ever-bigger pensions, causing the companies'
financial obligations for them to balloon.
Companies disclose little about any of this. But a Wall
Street Journal analysis of corporate filings reveals that
executive benefits are playing a large and hidden role in
the declining health of America's pensions. Among the
• Boosted by surging pay and rich formulas, executive
pension obligations exceed $1 billion at some companies.
Besides GM, they include General Electric Co. (a $3.5
billion liability); AT&T Inc. ($1.8 billion); Exxon Mobil
Corp. and International Business Machines Corp. (about $1.3
billion each); and Bank of America Corp. and Pfizer Inc.
(about $1.1 billion apiece).
• Benefits for executives now account for a significant
share of pension obligations in the U.S., an average of 8%
at the companies above. Sometimes a company's obligation
for a single executive's pension approaches $100 million.
• These liabilities are largely hidden, because
corporations don't distinguish them from overall pension
obligations in their federal financial filings.
• As a result, the savings that companies make by
curtailing pensions for regular retirees -- which have
totaled billions of dollars in recent years -- can mask a
rising cost of benefits for executives.
• Executive pensions, even when they won't be paid till
years from now, drag down earnings today. And they do so in
a way that's disproportionate to their size, because they
aren't funded with dedicated assets.
One reason executive pensions have grown so large is that
they are linked to ballooning overall executive
compensation. Companies often design retirement payouts to
replace a percentage of what a person earns while active.
But for executives, the percentage of pay replaced is itself
higher. Compensation committees often aim for a pension
that replaces 60% to 100% of a top executive's
compensation. It's 20% to 35% for lower-level employees.
David Dorman was chief executive of AT&T Corp. from 2002
until its merger with SBC Communications in November. He
left in January. His total of five years at AT&T earned him
a yearly pension of $2.1 million. That will replace 60% of
his annual salary and bonus in his final three years.
By contrast, former AT&T accountant Ralph Colotti's $28,800
annual pension replaces 33% of his final pay. He was at the
company for 33 years.
Mr. Colotti's pension was held down by a change AT&T made in
1998 in the formula used to calculate pensions. The switch
had the effect of freezing pension growth for older workers
like him. The 55-year-old now works at another company with
a pension plan. "Working here another 10 years won't make
up for what my old pension would have been" without AT&T's
change in formula, he said.
AT&T described its retirement benefits as excellent and said
a pension on the scale of Mr. Colotti's is good in the
telecommunications industry. Mr. Dorman's richer deal is
"reasonable, customary and comparable to what similarly
sized companies offer," AT&T said. A spokeswoman noted that
"in any industry, senior executives are almost always
provided with enhanced levels of benefits as a way to
recruit and retain the best talent and the best leadership
possible to lead the company."
In percentage of pay replaced, Pfizer's chairman and CEO,
Henry McKinnell, does best of all. His future $6.5
million-a-year pension will replace 100% of his current
salary and bonus.
Even as executives' pensions grow, many companies are
curtailing those for the rank and file. In one move,
hundreds of employers, including Boeing Co., Xerox Corp.
and Electronic Data Systems Corp., have switched to
pension formulas known as "cash balance" plans. One effect
is to slow the growth of older workers' pensions or halt it
altogether. That's what happened to Mr. Colotti at AT&T.
Other companies, including Verizon Communications Inc.,
Unisys Corp. and Sears Holdings Corp., are freezing their
pension plans for some workers. A freeze leaves intact
pensions already earned but prevents any further growth
during a worker's career.
Some employers have added pensions for executives at about
the same time as they limited those for others. McKesson
Corp. established a special pension plan for its executives
in 1995 and froze those of other workers two years later.
McKesson didn't respond to requests for comment.
Allied Waste Industries Inc. froze pensions for certain
salaried workers in 1999. Among those affected was Brad
Green, then a safety official at a business Allied Waste had
acquired. Although he never expected his pension to be big,
said Mr. Green, 45, the freeze meant any future growth "was
basically just wiped out with the stroke of a pen."
Four years later, Allied adopted a pension plan that covers
10 executives. It did so "to provide a competitive
recruitment and retention benefit," said Allied's treasurer,
Michael Burnett. He noted that the plan that was frozen had
come from a company Allied acquired.
Mr. Burnett added that all employees have a 401(k), a
savings plan to which they can contribute from their own
earnings. Many companies, including Allied, match part of
Companies that restrict regular pension plans often point to
the 401(k), some noting that they've enhanced their match of
contributions. Unlike pension plans, 401(k) plans don't
create a corporate debt or liability, since employees
provide most of the assets and firms are typically free to
halt any contributions of their own.
Companies generally are also free to alter, freeze or end
regular employees' pension plans, unless a union contract is
involved. But executive pensions often are protected from
management interference by employment or other contracts.
By curtailing pensions for regular workers, large companies
have reduced pension obligations to them by billions of
dollars in recent years. So pension obligations to regular
workers are stable or shrinking at many companies while
those for executives rise. At BellSouth Corp., for example,
the obligations for pensions for ordinary workers have edged
down 3% since 2000. The liability for pensions for
executives is up 89% over the same period. A BellSouth
spokesman noted that, like many executive pensions, the
benefit could be lost in the event the company becomes
The promise of any pension becomes a corporate obligation.
Although the payments are in the future, the promise means
the company has a liability now. And a number can be put on
Figuring the Bill
Pfizer's promise to pay Mr. McKinnell $6.5 million a year
for life in retirement equals an $83 million liability for
Pfizer today, federal filings by the drug maker show.
Pfizer defends Mr. McKinnell's pension as fair.
When Edward Whitacre, chairman and CEO of AT&T Inc., turns
65 in November, he'll be entitled to a pension of $5.4
million a year for life, plus an $18.8 million lump sum.
For this, AT&T's liability today is $84.4 million, according
to an actuarial estimate done for the Journal by Katt & Co.
of Mattawan, Mich. AT&T said Mr. Whitacre's pension
reflects four decades of service and 15 years of "very, very
strong and visionary management" as chief of the company,
which was called SBC much of that time.
UnitedHealth Group Inc. Chairman and CEO William McGuire
will get a $5.1 million annual pension after he retires,
plus a further $6.4 million at retirement. The result is a
UnitedHealth liability of about $90 million, according to
two actuaries. UnitedHealth declined to comment on their
estimate. In the wake of recent criticism of Dr. McGuire's
pay -- which includes $1.6 billion in unrealized
stock-option gains as of the end of last year -- the
managed-care company has capped his pension benefit, a
Companies sometimes offer several tiers of pensions for the
highly paid. The structure at IBM illustrates this.
Its chairman and CEO, Samuel Palmisano, is due a yearly
pension of about $4.7 million in retirement after age 60.
He's now 54. IBM's liability today for this is about $50.3
million, according to an estimate by Katt & Co.
Another IBM pension plan, which last year covered eligible
executives earning $351,000 or more, had a $204 million
liability at year-end, company filings show. And for a
third plan covering a broader group of the well-paid, IBM
had obligations totaling $1.1 billion. IBM declined to say
how many are covered by these plans, saying only that it is
To put the figures in perspective: The liability for IBM's
regular U.S. pension plan, covering 254,000 workers and
retirees, was $46.4 billion at the end of 2005.
An IBM spokesman described the estimate of its liability for
Mr. Palmisano's pension as high but declined to provide
another figure. He said Mr. Palmisano's pension from 32
years at the company will replace about 45% of his
compensation, which the spokesman called below average for
heads of major companies.
A result of these trends is that executive pensions make up
a significant portion of total pension liabilities at many
companies: 12% at Exxon Mobil and Pfizer; 9% at Metlife
Inc. and Bank of America; 19% at Federated Department
Stores Inc.; 58% at insurer Aflac Inc.
At some companies, the only people who have pensions at all
are executives. At Nordstrom Inc., the nearly 30,000
ordinary employees don't get pensions. But 45 executives
do. Another retailer, Dillard's Inc., also provides
pensions only to certain officers. Neither had any comment.
Companies' retirement liabilities for their executives have
also grown through another little-noticed trend: Over
recent years, an increasing portion of executives' pay has
been postponed, via pension and deferred-compensation plans,
rather than given in current paychecks.
Out of Sight
Even if a company's liability for executives' pensions
totals hundreds of millions of dollars, its employees and
shareholders may never know. Companies don't have to report
this obligation separately in federal financial filings. A
few specify it in a footnote, and some provide clues that
make it possible to derive the figure.
The minimal disclosure dates from the late 1980s, when
companies first were required to report pension liabilities
but were allowed to aggregate all of them. At the time,
distinguishing executive pensions was less of an issue
because they were smaller. When they ballooned along with
executive pay in the 1990s and 2000s, the rules didn't
change. Most employers have continued to blend pension
figures together. Wall Street Journal publisher Dow Jones &
Co. said it hasn't broken out executive-pension figures but
will "re-examine whether to do so going forward."
When they do mention executive pensions in filings,
companies often use terms that only pension-industry
insiders would recognize. Time Warner Inc.'s filings
include -- as part of a category called "other, primarily
general and administrative obligations" -- a footnote
reference to "unfunded defined benefit pension plans."
Those are executive pensions.
Lumping pensions together can also give a false impression
of the security of ordinary workers' plan. Someone browsing
Time Warner's filings might think its pensions for regular
employees were underfunded by 7%. This impression would be
illusory. The pension plan for regular Time Warner
employees has more assets set aside in it than the plan
needs to pay benefits well into the future. The shortfall
is due entirely to a plan for highly paid employees. That
one has a $305 million unfunded liability.
A spokeswoman for Time Warner said the company's elite
pensions cover more than just a small number of top
executives but declined to say how many. She said Time
Warner goes "to great lengths to make complex information
accessible to the average investor."
A Debt and Its Cost
Perhaps the most significant effect of the limited
disclosure is to make it difficult, or impossible, to
evaluate company statements about their retirement burdens
and the need to cut benefits. To see this, it's necessary
to understand a bit about how pensions are accounted for.
Pension plans, whether for executives or for others, are
obligations to pay. In other words, they're debts. And
like any debt, they have what amounts to a carrying cost.
That carrying cost is part of a company's pension expense.
In the case of pensions for regular employees, the expense
is partly or wholly offset by investment returns on money
the company set aside in the pension plan when it "funded"
Executive pension plans are different. They're normally
left unfunded. They have no assets set aside in them. That
means there is no investment income to blunt the expense.
The result is that obligations for executive pensions create
far more expense for an employer, dollar-for-dollar, than
pensions for regular workers.
A company's pension expense is something it has to subtract
from its earnings each quarter. The cost of executive
pensions, having no investment income to cushion it, hits
the bottom line with full force.
An Outsize Impact
In Pfizer's overall U.S. pension obligation of about $9
billion, executive pensions account for about one dollar in
eight. Yet the pension expense they generate is
proportionately far larger -- equal to more than half as
much as that from pensions for regular employees and
retirees, who are much more numerous. The executive plans
cover 4,200 people. The regular plans cover more than
100,000. Pfizer had no comment on this.
At AT&T Inc., the pension liability for executives was a
modest 3.8% of the company's total pension obligation at the
end of last year. Yet these promises to 1,000 or so highly
paid people generated more than 45% of AT&T's pension
expense. The expense for them came to $113 million last
year, and reduced AT&T's 2005 earnings by that amount.
The other 55% of pension expense? It covered 189,000
AT&T's controller, John Stephens, confirmed that executive
pensions cause a bigger drag on earnings, per dollar of
liability, than pensions for others. He added that AT&T,
like some other companies, has informally earmarked an
undisclosed amount of assets for paying executive pensions
in the future. But while these assets earn investment
returns, they don't lower pension expense, because the
assets aren't irrevocably dedicated to this purpose. The
executive pension plan, in other words, isn't funded.
Why don't companies just fund executive pensions? Chalk it
up to taxes. Contributions that companies make to regular
pension plans are tax-deductible and grow tax-free.
Congress set that rule to encourage employers to provide
pensions for the rank and file. But a company that
contributes assets to an executive pension plan gets no tax
break. In fact, there's a tax penalty: Money contributed
to such a plan is considered current compensation to the
executives, and they owe personal taxes for it.
There's often another reason executive pensions are more
costly. The expense of regular pensions can be offset not
just by investment returns on the assets but also by gains
that result when companies cut benefits.
Cutting a benefit naturally cancels part of an employer's
liability. Under accounting rules, a canceled liability
equates to a gain. That gain reduces pension expense from
the regular workers' plan. So thanks both to investment
returns and to gains from cutting benefits, regular pension
plans are less costly than those for executives.
These accounting effects may sound technical but they
matter, because companies that curtail ordinary workers'
benefits often cite their pension "costs" or "expense" as
In January, IBM said it will freeze the pensions of all U.S.
employees and executives. The move reduced its pension
liability by $775 million. IBM cited pension costs,
volatility, and unpredictability. It didn't mention that a
quarter of its U.S. pension expense last year resulted from
pensions for several thousand of its highest-paid people.
The numbers: $134 million of pension expense was for the
well-paid; $381 million was for all active and retired
employees, more than a quarter of a million people. An IBM
spokesman confirmed the numbers but said the expense for its
executive plans came to only about 1% of pretax earnings
from continuing operations.
Lucent Technologies Inc. has pointed to retiree benefits as
a burden and has cut benefits in a number of ways. For
instance, for various retirees in recent years, Lucent has
used a less-generous pension formula; eliminated dental and
spousal medical coverage and death benefits; and raised
retiree health-insurance premiums. In a recent filing, the
Murray Hill, N.J., telecom-equipment firm said, "Lucent's
pension and postretirement benefits plans are large ... and
Yet the pension plans for regular Lucent employees and
retirees, who number about 230,000, are overfunded. In
fact, they're so full of cash that the investment return on
their assets not only erases the pension plan's expense --
it adds to earnings. In the fiscal year ended last Sept.
30, these pension-plan assets pumped $973 million into
Lucent's bottom line, accounting for about 82% of the
They would have pumped in still more, save for an unfunded
pension plan for Lucent's highest-paid people, which had a
liability of approximately $422 million last year. Lucent
confirmed that pensions for its executives and those earning
more than $210,000 in 2005 reduced net income. It declined
to say by how much. A spokeswoman said Lucent follows U.S.
pension accounting and disclosure rules and that if the
expense for retiree medical plans were subtracted, its
overall retirement benefits contributed $718 million to
When General Motors cites retiree costs, the giant auto
maker has a point: It owed nearly 700,000 U.S. workers and
retirees pensions that totaled $87.8 billion at the end of
But $95.3 billion had already been set aside to pay those
benefits when due.
All of these assets are earning investment returns, which
offset the pensions' expense. GM lost $10.6 billion in
2005. But deep as its losses have been, they would have
been far worse without the more than $10 billion per year in
investment income that the GM pension plan for the rank and
The pension plan for GM executives is another matter.
Unfunded to the tune of $1.4 billion, it detracts from GM's
bottom line each year.
Just how much is a mystery, because GM doesn't break out the
figure. It said executive pensions are "a very small
portion of our overall expense" but declined to give the
Earlier this year, GM announced it would freeze the pensions
of its 42,000 salaried workers starting next January, as
well as of those 5,200 highly paid employees. The freeze of
the executive pensions will cut GM's pension liability by
$60 million, while its freeze of salaried workers will yield
a far bigger reduction, $1.6 billion.
A spokeswoman for GM said its concerns about its pension
plans have eased, though the company remains concerned about
retiree health-care costs. With the pension freeze and
improved returns on its pension assets, including billions
of dollars GM has contributed to the plans in recent years,
"I would say pension really is not a problem any more," the
spokeswoman said. She said that GM has no fixed obligation
to pay the executive benefits and could renege at any time,
although she called such a move unlikely.
GM has often said its U.S. pension plans added about $800 to
the cost of each car made in the U.S. in 2004. It declines
to say how much was due to executive pensions.
Ellen E. Schultz at
firstname.lastname@example.org and Theo Francis at