Pension cuts miss executives

As the AJC reported recently, seven out of 12 of metro Atlanta's largest companies, including Delta Air Lines, SunTrust Banks and Coca-Cola, have frozen or converted their traditional employee pension plans to cheaper versions in recent years, or disclosed plans to do so.

Pension experts say the pace of such moves has accelerated in recent years as the financial crisis has hit pension plans' asset values, forcing companies to pump more cash into underfunded plans.

To some degree, executives also have felt the economic pinch. According to a recent survey by consulting firm Watson Wyatt, about a fifth of companies have frozen executive salaries and almost a third have cut bonuses. Just 8 percent, though, have trimmed or eliminated separate retirement plans for their executives.

A few, including SunTrust, Newell Rubbermaid, retailer Talbots and newspaper company McClatchy, have frozen or trimmed executives' retirement perks at the same time that they froze or trimmed their traditional pension plans for other employees.

"Our intention was that the executives and the rank-and-file employees are treated equally," said David Doolittle, spokesman at Newell Rubbermaid. The consumer products manufacturer froze 12,500 employees' pensions in 2004 and started making extra contributions to a 401(k)-style plan.

In an e-mail, a SunTrust spokesman said the company's aim was to have "all SunTrust teammates sharing the impact of the changes."

In many cases, though, executives are emerging from cost-cutting moves with their regular pensions largely intact because they are "grandfathered" into the older, more generous plans along with other long-term employees.

But in some cases, companies also have exempted their executives' supplemental pension plans from cutbacks affecting the wider work force. And some have even boosted benefits in executives' separate retirement plans (or SERPs) to make up for benefits lost when the company froze or modified their regular pensions.

SERPs are not tracked

No government statistics track how companies treat SERPs because they are not tax-exempt, as broader-based pension plans are. Large and mid-sized companies have long had SERPs to provide retirement benefits on executive pay that exceeds the Internal Revenue Service's $245,000 pay cap related to tax-deductible pension contributions.

Most of the time, major firms don't curtail their executives' retirement benefits at the same time they freeze broader pensions, said David Williams, an Atlanta lawyer with Schiff Hardin who has long advised companies on employee benefits and executive compensation.

That's because companies argue that they need SERPs to retain top management, and because such plans don't cause a cash drain like traditional plans do, he said.

Companies have to contribute cash to traditional pension plans "in good times and bad," said Williams. "With the executive plans, the company simply makes a promise to pay retirement for the executive at some time in the future," he added, usually without saving extra cash for that purpose.

"SERP plans are at risk," said Williams. "If the company goes under, there goes the SERP."

But a company's decision to treat executives' retirement perks differently can backfire, as happened earlier this decade at Delta Air Lines.

In 2002, the airline landed in controversy when, despite heavy losses and job cuts, it spent tens of millions of dollars to create pension trusts to insulate many executives' SERPs from bankruptcy. About the same time, Delta had announced plans to move away from traditional pensions for its general work force.

The airline halted funding for the executive pension trusts after the move became public in 2003, and CEO Leo Mullin stepped down later that year.

Dozens of executives later departed before the carrier filed bankruptcy in 2005.

When to freeze plan

Companies' claims that they need to maintain separate executive pensions to retain top talent are "disingenuous," said Nancy Hwa, spokeswoman for the Pension Rights Center, a nonprofit advocacy group in Washington D.C.

"If a company is in enough financial trouble to freeze their regular pension plan, then they should have their executives share in the sacrifice," said Hwa. Instead, "It's placing the burden entirely on the backs of the rank-and-file workers."

Even more worrying, she said, are profitable companies that decide to follow the pattern.

"Companies have frozen their plans in the past when they were in financial trouble, but what we've seen since 2005 is a disturbing trend of companies freezing their plans when they are healthy," she said.

Coca-Cola, which reported a $5.8 billion profit last year, certainly fits that pattern. The company told employees in February that at year's end, it will partially freeze its old pension program and convert to a less costly and more predictable cash-balance plan, which offers employees a lump-sum payment instead of a fixed income when they leave the company.

So far, Coca-Cola hasn't changed its supplemental executive plan, which covers about 1,200 executives and managers.

However, Coca-Cola spokeswoman Kerry Kerr said in an e-mail that the executive retirement plan is being treated "exactly the same" and will be converted to a cash-balance plan. Those changes will be disclosed next year in Coca-Cola's filings with the Securities and Exchange Commission.

In some cases, there aren't any obvious disclosures simply because a company hasn't touched its executives' supplemental pensions even as it froze the broader pension plan.

That was the case at credit reporting firm Equifax, which posted a $273 million profit last year. Equifax left its executives' plan untouched while partially freezing its 4,000 U.S. employees' regular pension plans on Jan. 1. At the same time, Equifax boosted its contributions to employees' 401(k) plans, which are "more relevant and current to our employees," said Equifax spokesman Tim Klein.

Klein said Equifax did not freeze or change the SERPs of about a dozen top executives because it wanted to maintain retirement plans that were "competitive across the board."

The regular pensions of about eight of the executives also weren't affected by the partial freeze, he said, because they met the same age and length-of-service rules that grandfathered in about 10 percent of the company's employees.

Exempting execs

Some companies did disclose changes to executive retirement perks at the same time they were freezing or converting their regular pension plans.

Auto parts retailer Genuine Parts, which reported a $475 million profit last year, partially froze the pensions of about 80 percent of its U.S. employees at the end of last year.

Chief Financial Officer Jerry Nix said the partial freeze was necessary because "the obligation and the expenses going forward were just too great." Instead, Genuine Parts boosted its contributions to employees' 401(k) plans.

Nix said that along with about 20 percent of Genuine Parts' employees, almost 90 percent of its 100-plus executives and upper management have been grandfathered into the old pension plan.

Meanwhile, Genuine Parts barred new participants from its executive SERP. But the company made sure the 114 executives and upper managers already in the plan were exempted from any freeze on their SERP benefits.

Noting that some managers' regular pensions were partially frozen, "regardless, a Key Employee's Credited Service under this [supplemental retirement] plan is NOT frozen," Genuine Parts disclosed in a filing with the SEC.

That language effectively exempts most managers from any pension freeze, Nix confirmed.

Cover Story | Compensation

Business

Retirement plans: Freezes, SERPs

After more than two decades of dramatic changes, less than a third of U.S. employees have traditional pensions, and less than 20 percent of private-sector employees do, according to pension experts. Along the way, employers have frozen pensions, set up separate retirement plans for executives, and put employees in 401(k) or cash-balance plans.

Some brief definitions:

Pension freeze: Comes in a variety of forms, often accompanied by a switch to a 401(k) plan or a conversion to a cash-balance plan. In a complete freeze, employers halt all growth of future retirement benefits for all employees as of a particular date. In a partial freeze, a company may only bar new employees and "grandfather" some employees in the old plan, or halt pension credit for future years of service but not pay increases.

Supplemental executive retirement plan (SERP): Often based loosely on traditional pension formulas, these plans cover the portion of retired executives' benefits that exceeds the Internal Revenue Service's cap for tax-deductible traditional plans. Most employers don't set money aside in SERPs, covering the retired executives' often much-bigger SERP benefits on a pay-as-you-go basis.

Russell Grantham

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How we got the story

> This article is based on a review of companies' disclosure reports to the federal Securities and Exchange Commission, particularly footnotes and exhibits in their 10-K annual reports, 10-Q quarterly reports and proxy statements dealing with retirement plans and executive contracts. Other information came from interviews and e-mail queries to company officials and pension experts.

On ajc.com

Read Russell Grantham's earlier report about Atlanta companies freezing employee pensions. At www.ajc.com/business.