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

Clark/Bardes, the COLI consultant, is also vague. A footnote in the income section of its 2000 filing says the “other income” category “includes $1 million in life insurance proceeds.” The company received the $1 million when an employee died in a plane crash.

CHAPTER 8

Unfair Shares: USING EMPLOYEES’ PENSIONS TO FINANCE EXECUTIVE LIABILITIES

BUYING LIFE INSURANCE on workers is one way many companies informally fund executive deferred compensation. Tapping the regular pension plan is another. Intel, the giant semiconductor chip maker, moved more than $200 million of its deferred-compensation obligations into the regular pension plan in 2005. This move converted an unfunded liability—deferred compensation for the top 3.5 percent to 5 percent or so of its workforce—into a fully funded, regular pension benefit.

When these 12,000 or so highly paid employees and executives at the chip maker get ready to collect their deferred salaries, Intel won’t have to pay them out of cash; the pension plan will pay them.¹³

There was another benefit as well: Intel contributed $187 million to the pension fund to cover the executive obligations. Normally, companies can deduct the cost of deferred compensation only when they actually pay it, often many years after the obligation is incurred. But Intel’s contribution to the pension plan was deductible immediately. Its tax saving: nearly $70 million in the first year.

Meanwhile, the pension contribution enabled Intel to book as much as an extra $136 million of profit over the ten years that began in 2005 (thanks to the pension accounting rules that let companies immediately record noncash income from pension-plan contributions, based on what they expect the assets to earn when invested). The $136 million was Intel’s estimate of the returns on the contribution. The company’s effective guaranteed return on the contribution in the first year: 40.6 percent.

Intel’s move wasn’t illegal, though it had a peculiar result: It turned a pension plan for a company with more than fifty thousand workers primarily into a fund to pay for the deferred compensation of the company’s most highly paid employees, roughly 4 percent of the workforce.

If it were this easy for all employers to just shift executive liabilities into their employee pension plans, they would all have done so long ago. But tax rules put up a roadblock. To get tax breaks, pensions have to be open to a broad group of employees and can’t discriminate in favor of the highly paid.

Benefits consultants, however, found a loophole in the discrimination rules that has enabled a growing number of large companies to shift hundreds of millions of dollars of executive liabilities into rank-and-file pensions. Using complex and proprietary formulas, the consultants determine how much discrimination a pension plan can achieve without technically violating discrimination rules.

The result might be a dollar amount, say, $200 million, which would be allocated to highly paid employees in addition to their regular benefits from the plan. In Intel’s case, the participants got their regular pension, plus an amount of their deferred compensation paid from the pension. These arrangements are often called QSERPs, which stands for “qualified supplemental executive retirement plan.”

The shift doesn’t increase the total amount a person receives; when the executive liability is moved to the pension plan, an equivalent amount of deferred compensation or supplement executive pension is canceled. The goal of the maneuver isn’t to boost executive benefits but to harness the pension plan to pay them. “QSERPs clearly offer a tremendous opportunity for some employers to prefund key executive retirement benefits,” noted Watson Wyatt’s marketing material.

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Intel and its pension plan were healthy. But companies in financial distress have an incentive to do this, and when they shovel executive obligations into underfunded pension plans, the result can backfire.

In December 2002, Oneida Ltd., a flatware maker in upstate New York, amended its pension to give then chairman and CEO Peter J. Kallett an additional pension of $301,163 a year in retirement. This was in addition to the $116,000 a year he was already eligible for in the regular pension. The company then transferred the liability for that additional amount from his executive pension.