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

Unfortunately for employees and retirees, this new era of incentive pay coincided with companies’ newfound ability to use the pension and retiree health plans to boost income. Knowingly or not, when top management ordered cuts for retirees, they were indirectly boosting their own retirement wealth.

Spiraling executive pay in turn led to spiraling executive pensions. Commonly called SERPs—supplemental executive retirement plans—these top-level pensions generally provide millions of dollars in pension benefits.

Ed Whitacre, AT&T’s former chief executive, was president of the company when it froze pensions, and slashed retiree health benefits. When he retired in 2007, he was granted the usual executive entitlements, including the use of corporate aircraft, AT&T office facilities and support staff, home security, and club memberships, plus payments to cover the taxes he pays on the benefits. Whitacre would also be paid $1 million a year under a three-year consulting contract. On top of all that, he also left with a $158 million payout. This type of retirement package, which no longer shocks people, is detailed in the SEC filings that disclose the compensation of the handful of top officers at a company. But they’re the tip of a well-hidden iceberg.

Spiraling executive pay doesn’t just lead to growing executive pension obligations. It has been creating another giant liability: deferred-compensation obligations. As pay has grown, top earners have channeled more of it into deferred-compensation plans, which enables them to postpone receiving the money and delay paying taxes on it. The deferrals grow with interest and employer contributions, tax-deferred, which further boosts the IOU.

Deferred-comp plans have been called 401(k)s on steroids, because employees contribute pay, employers typically match it, and the employees allocate the funds among a selection of investments. But there’s a critical difference: The compensation employees contribute to 401(k)s is actual cash that goes into a separate account at an outside investment firm. These “defined-contribution plans” don’t create a pensionlike liability. Deferred-comp plans do. The participant doesn’t actually receive the pay before he defers it; it is merely an IOU from his employer. Another way to put it: Employers have been putting much of their spiraling executive pay—pensions and deferred compensation—on the equivalent of a giant credit card.

SCAPEGOATS

Combined, executive legacy liabilities have grown to multi-billion-dollar obligations. General Electric owes an unknown number of executives a total of $5.9 billion in retirement, which amounts to 15 percent of the total pension liability for more than 500,000 workers and retirees. Currently, executive legacy liabilities account for 8 percent to as much as 100 percent of pension obligations at some of the largest Fortune 500 companies.

For accounting purposes, executive liabilities are no different from regular pensions and retiree health benefits. They’re debts, and can drag down earnings. There’s a critical difference, though. Unlike pensions (which employers fund) and 401(k)s (which employees fund), supplemental executive pension and savings plans are unfunded. This is due to taxes: If a company set up a pension fund for executives, it wouldn’t be allowed to deduct the money, and the assets wouldn’t grow tax-deferred.

With no pool of assets that are earning returns, which offset the annual interest cost on the debt, the IOUs for executives always have an interest cost, which can hit earnings hard. But guess which pensions get the blame?

Employers typically aggregate their regular pensions and executive pensions when reporting pension liabilities and costs, so even if the only costly pensions are for the executives, the public doesn’t know. Nor do many analysts, whose reports overstate the amount of underfunding, because the pension obligations include executive pensions, which aren’t funded. The data, which comes from SEC filings, also includes pensions at companies like Nordstrom. Its pension tables indicate that it owes $102 million in pensions and is 100 percent underfunded. That’s because the cheery shoe clerks and store managers don’t have pensions. The pensions are only for “certain officers and select employees.”

But don’t expect employers to bemoan their spiraling executive obligations. In a letter to stockholders dated March 16, 2006, the chief executive of Unisys, Joseph McGrath, blamed “higher pension expense” for the loss the company had reported the previous year. This was partly true: Financial filings show that pension expenses reduced Unisys’s earnings by $104 million.