tale of two pension plans: regular vs. CEO
Corporate promises for a traditional pension benefit
can be easily broken for the average worker, but not so for the
Traditional pension plans for the average Joe are
creeping into the Ice Age, as more companies have announced the
decision to deep-freeze their pension plans to current or new employees
-- or both. General Motors Corp. and Alcoa are among the latest
to jump on the frozen-pension bandwagon that includes IBM, Verizon,
Sears, Circuit City, Hewlett-Packard, Lockheed Martin, Motorola,
Aon Corp. and NCR. Most of these companies are not on the verge
of bankruptcy, mind you.
This freeze phenomenon spells disaster for boomers
who had been promised a pension and who have 10 years or more left
till retirement. That's because benefits under the traditional pension
formula ordinarily accrue at accelerated levels for older employees
as they approach retirement. The last 10 years are absolutely crucial.
With frozen plans, benefits stop building up altogether.
Another trend among companies is to convert defined-benefit
plans into cash-balance plans, which substantially reduces a pension's
value because the benefit buildup is calculated differently than
with a traditional pension plan. Hundreds of companies have chosen
to do this in recent years.
But the retirement plans of highly paid executives
are not affected at all by these trends. That's because they're
a different breed. I mean the retirement plans, not the execs, though
I suppose that statement could apply to either. Most top executives
have so-called "supplemental executive retirement plans,"
or SERPs, that are governed by a different set of rules, because
they're nonqualified plans.
Qualified pension plans have tax benefits for both
employer and employee and have to pass rigorous IRS nondiscrimination
tests that ensure some semblance of fairness among highly compensated
employees and those that are not highly compensated. Nonqualified
plans have no tax benefits and no such fairness standards.
Congress suddenly appalled
Recently, some members of Congress have voiced objections to the
retirement pay disparity between top executives and their employees.
One bill, introduced by Rep. George Miller, D-Calif., would disallow
companies from funding pensions for the top brass if they're unable
to adequately fund their workers' pensions. Other bills along similar
lines have surfaced.
"This huge disparity between ... protected pensions
that CEOs have versus production workers is really immoral,"
Miller told the Los Angeles Times.
Just how lavish are the retirement deals for top execs?
It's not all that transparent because current rules allow their
retirement packages to be obscured from investors, financial analysts,
the media and everyone else. That might change in the future, as
the Securities and Exchange Commission last month proposed that
disclosure requirements be improved concerning executives' pay,
including their retirement benefits.
As it stands now, shareholders rarely get wind of
just how generous executive retirement packages can be until it's
too late -- when the executive already starts drawing payments.
This information is not included in the summary compensation tables
required under current law that are readily available to the public.
Those tables list various forms of compensation awarded
to the top five executives in a company, but the retirement plan
is not on the radar screen, Lucian Bebchuk wrote in a recent commentary
for the Wall Street Journal.