Retirement Heist: how companies plunder and profit from the nest eggs of American workers

The biggest trigger of a huge pension boost can be a change in control. Scott Ford, president and chief executive of Alltel Corp., had accumulated a pension of $16.8 million through 2007. But after the company was acquired by Verizon, change-in-control provisions tripled Ford’s salary and awarded three additional years of service. He left the company in 2008 with a pension payment of $51.7 million. Altogether, the five departing top executives received pension payouts of $131 million.

Despite their limitations, the executive pension tables in the proxy are better than nothing. In the S&P 500, 160 companies don’t have the kinds of retirement benefits that they are required to disclose in the proxies’ pension tables. This doesn’t mean that those executives receive no retirement benefits, just that the companies characterize the benefits as something other than a pension, so the benefits don’t fall under the enhanced SEC disclosure rules that companies were required to adopt in 2007. These require companies to place an overall value on their executives’ pension benefits.

Omnicom, for example, established a Senior Executive Restricted Covenant & Retention Plan in 2006 to provide top executives at the global advertising giant with an annual payment, based on salary and years of service, for fifteen years after they depart. John Wren, the company’s chief executive, will receive $1.3 million a year for fifteen years. The retirement payments will grow with a cost-of-living adjustment, a feature that most companies have discontinued in the pensions for regular employees. The liability for this? Anyone’s guess.

Some companies even give the impression that they’ve cut executive retirement benefits. Companies that freeze their regular pension plans sometimes freeze their executive pensions, too, especially when the plan is a so-called makeup, or excess, plan that mirrors the regular 401(k) but allows greater deferrals. But companies may take steps to soften or eliminate the impact. State Street Corp. froze its executive pensions effective January 1, 2008, but awarded executives “transition” benefits that postponed the freeze for two years. Thanks to this feature, and a drop in interest rates and other factors, their pensions rose 47 percent in 2008, and CEO Ronald Logue’s pensions (like most top executives, he has more than one) rose by $7.8 million to $25.3 million. The company also added a retirement savings component to the plan and will contribute $400,000 a year in cash and stock to each executive’s account.

Lincoln National Corp. also froze both its regular and executive pensions in 2008. When it did, it converted the executive pensions to lump sums, enhanced their value by $6.3 million, and added the benefits to a new deferred-compensation plan, to which the company will contribute a minimum of 15 percent of the executives’ total compensation each year. That year, it contributed $12.3 million to the new account for CEO Dennis Glass. The company didn’t enhance the 401(k) plans of regular employees whose pensions it froze.

One thing people can count on: Unlike the pensions of regular employees, executive liabilities aren’t going away. They’re protected by contracts. Though lower-level executives can lose their deferred comp in bankruptcy, the pensions and savings of top officers are usually protected by bankruptcy-proof trusts. Chesapeake Energy, the secondlargest natural gas producer in the United States, doesn’t disclose the total amount it owes executives, but it’s no doubt a hefty sum. Aubrey K. McClendon, the chief executive, had compensation that totaled $156 million in the last three years. He’s also owed $120 million in pension and deferred-compensation benefits. In its annual report, Chesapeake needs thirty-four pages to describe its executives’ retirement benefits. The benefits for 8,200 employees require only half a page to describe—they don’t have pensions.

DEFERRED GRATIFICATION

Pensions aren’t the only executive liability. So is much of their pay. Unlike salary paid out to factory workers or the CFO, deferred compensation creates huge, and largely hidden, obligations. The plans can cover thousands of lower-level executives and other highly compensated employees, who participate in so-called excess plans. These enable employees to defer some of their salary that they can’t put into the 401(k) because of tax laws that limit total employee contributions to $15,000. So if a 401(k) allows employees to contribute 15 percent of pay, someone making $200,000 will be allowed to contribute only a total of $15,000 to the 401(k), and can defer the rest in the excess plan.