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'Pension Fairness Act' Proposed to Freeze Some Executive Benefits
By Ellen E. Schultz, the Wall Street Journal
October 8, 2004
Companies that dump their underfunded pensions during bankruptcy would be prohibited from paying special pensions to top executives for the following five years, under a bill introduced yesterday.
Sponsored by Rep. George Miller of California, the ranking Democrat on the Committee on Education and the Workforce, the bill comes in the wake of concerns that pension terminations at airline and steel companies will lead other financially troubled companies to foist their obligations onto the Pension Benefit Guaranty Corp., the quasi-public insurer that takes over failed pensions.
The bill, the Pension Fairness Act, also would freeze special pension payments to executives and directors for five years following a move to convert the traditional pensions for regular employees to "cash-balance" pensions. These types of pensions essentially freeze pension growth and instead provide the equivalent of a small annual pay-based contribution, which results in significantly lower pensions for many older workers.
While the bill has little chance of passage before Congress recesses before the election, it is among the first efforts by a lawmaker to link the fate of executive pensions to rank-and-file pensions.
In recent years, many companies have been slashing retirement benefits for millions of workers, and forgoing contributing to underfunded pension plans. Meanwhile, they have been beefing up pension benefits for top executives in special bankruptcy-proof trusts.
Delta Air Lines, for instance, set up bankruptcy-proof pension programs for top executives in 2002, and contributed millions of dollars to the trusts, even as its regular pension plans were underfunded by $4.9 billion. (The plans were underfunded by $5.7 billion at the end of 2003.) Then in 2003 the carrier converted one of its pensions for salaried employees to a "cash-balance plan."
Delta has subsequently threatened to file for bankruptcy, which could indicate it might seek to turn its pensions over to the PBGC. If that happened, many employees would receive reduced pensions, because the PBGC pays only the maximum guaranteed benefit, which currently is a pension of $44,386 a year at age 65. A spokesman for Delta notes that most of its employees would receive full pension benefits under the
PBGC.
Other companies that set up special pension trusts for top executives prior to or in the wake of bankruptcy include UAL Corp., LTV Corp., and Conseco Inc.
Companies defend their practices, saying they need to retain top talent during times of financial crisis, and that executives are more vulnerable in bankruptcy than other workers because their pensions aren't protected by the
PBGC.
But the trend illustrates the growing gap in retirement security between most employees and those at the very top. As senior executives rely more on their special pensions, they have less incentive to ensure that the regular pension plan offers adequate benefits -- or is adequately funded. "In too many instances, CEOs pay themselves bonuses based on company profits that were created simply by cutting pensions. This is patently unfair," said Karen Ferguson, director of the Pension Rights Center, an employee advocacy group in Washington. She added that while the bill will not end corporate abuse of pension plans "it will at least be a step in the right direction."
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