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

But the company was in financial trouble, and the pension plan was one place to look for relief. Benefits consultants pondered the situation and concluded that pension cuts would be appropriate. Why? Because the Mercantile pension plan was more generous than those of other retailers, the consultants said. At the same time, the consultants concluded that the executives’ pensions weren’t “competitive” with others in the industry. To resolve this supposed imbalance and bring Mercantile’s retirement benefits in line with those of its peers, the board voted to reduce the pensions of low-paid workers and boost executive pensions. Two years later, Dillard’s Inc., a Little Rock, Arkansas–based retailing chain, bought Mercantile, terminated the pension plan, and captured the surplus.

Towers Perrin, the consulting firm that helped Mercantile with these kinds of decisions, merged with Watson Wyatt in 2010. Now called Towers Watson, the global consulting firm continues to help the largest companies in the United States, Canada, the United Kingdom, the Netherlands, and Germany shrink retiree benefits and boost executive pay and pensions.

Towers Watson practices what it preaches. Its employees have a cash-balance pension plan, while top executives have a supplemental pension with all the bells and whistles that have been stripped from rank-and-file pensions, including a generous formula based on final pay, which spikes in value in the later years, and the ability to retire at sixty with full benefits. The company reimburses executives for their FICA (payroll) taxes and “grosses up” the payments (i.e., it pays the taxes on the tax payments). When top managers depart, the company uses an unusually low interest rate, 3.5 percent, to calculate their lump-sum payouts, which results in a larger payment. In fiscal 2010, the executive pension liability for the combined company stood at $627 million, 32 percent of the total pension obligation. The company also paid out $496 million in “discretionary compensation,” i.e. bonuses, of which most, or all, went to executives.

UNDERSTATEMENT

Like many public pension plans, executive liabilities have been growing quietly behind the scenes, producing a mounting obligation, much of it hidden. Even when a company owes its executives billions of dollars, it can be almost impossible to tell because of the way companies bundle all their pensions together in securities filings.

When companies mention executive pensions at all, they typically use terms that only pension-industry insiders would recognize, such as “nonqualified obligations” and “unfunded defined benefit pension plans.” Comparing the obligation and cost of executive pensions to regular ones is possible only at the few companies that actually break out the figures (like GE) or provide enough clues to enable a determined researcher to back the figures out of the totals.

Executive pensions are like public pensions in another critical way: The liabilities are often lowballed. So even if one is able to identify the current liability for executive pensions, the figure may provide an unrealistic view of what the company will ultimately pay out, for a variety of reasons, including the way they are calculated.

Like most public pensions, executive pensions are calculated by multiplying years of service and pay—the formula many private employers have abandoned for regular employees because the benefits grow steeply in the final years. With pensions based on final pay, an individual has a big incentive to make sure the final pay is as high as possible. A firefighter or police officer, for example, might work hundreds of hours in overtime in their final years on the job, a move that might add $50,000 a year to a pension.

Executives do essentially the same thing, with bigger payoffs, and have a variety of ways to boost their pay—and thus their pensions—by millions of dollars prior to departure or retirement. One way is to simply change the definition of “pay” to include more types of compensation. ConocoPhillips included “certain incentive payments” when it totted up CEO Jim Mulva’s pension in 2008, which increased it by $9.5 million and brought it to a total of $68 million. The same year, a $6 million pay increase for Merck’s chief executive, Richard T. Clark, pushed his pension from $11.9 million to $21.7 million.