This is the pension squeeze companies aren't talking about: Even as many reduce, freeze or eliminate pensions for workers -- complaining of the costs -- their executives are building up ever-bigger pensions, causing the companies' financial obligations for them to balloon.In summary, note that the obligations UnitedHealth Group Inc. has to pay its current CEO Dr William McGuire's pension, and Pfizer Inc. has to pay its current CEO Henry McKinnell are substantial protions of the companies' total pension obligations and constitute an important drain on the companies' earnings.
Companies disclose little about any of this. But a Wall Street Journal analysis of corporate filings reveals that executive benefits are playing a large and hidden role in the declining health of America's pensions. Among the findings:
• Boosted by surging pay and rich formulas, executive pension obligations exceed $1 billion at some companies. [For example,] Pfizer Inc. (about $1.1 billion ...).
• Benefits for executives now account for a significant share of pension obligations in the U.S., an average of 8% at the companies above. Sometimes a company's obligation for a single executive's pension approaches $100 million.
• These liabilities are largely hidden, because corporations don't distinguish them from overall pension obligations in their federal financial filings.
• As a result, the savings that companies make by curtailing pensions for regular retirees -- which have totaled billions of dollars in recent years -- can mask a rising cost of benefits for executives.
• Executive pensions, even when they won't be paid till years from now, drag down earnings today. And they do so in a way that's disproportionate to their size, because they aren't funded with dedicated assets.
One reason executive pensions have grown so large is that they are linked to ballooning overall executive compensation. Companies often design retirement payouts to replace a percentage of what a person earns while active.
But for executives, the percentage of pay replaced is itself higher. Compensation committees often aim for a pension that replaces 60% to 100% of a top executive's compensation. It's 20% to 35% for lower-level employees.
In percentage of pay replaced, Pfizer's chairman and CEO, Henry McKinnell, does best of all. His future $6.5 million-a-year pension will replace 100% of his current salary and bonus.
Even as executives' pensions grow, many companies are curtailing those for the rank and file.
Some employers have added pensions for executives at about the same time as they limited those for others. McKesson Corp. established a special pension plan for its executives in 1995 and froze those of other workers two years later. McKesson didn't respond to requests for comment.
The promise of any pension becomes a corporate obligation. Although the payments are in the future, the promise means the company has a liability now. And a number can be put on it.
Pfizer's promise to pay Mr. McKinnell $6.5 million a year for life in retirement equals an $83 million liability for Pfizer today, federal filings by the drug maker show. Pfizer defends Mr. McKinnell's pension as fair.
UnitedHealth Group Inc. Chairman and CEO William McGuire will get a $5.1 million annual pension after he retires, plus a further $6.4 million at retirement. The result is a UnitedHealth liability of about $90 million, according to two actuaries. UnitedHealth declined to comment on their estimate. In the wake of recent criticism of Dr. McGuire's pay -- which includes $1.6 billion in unrealized stock-option gains as of the end of last year -- the managed-care company has capped his pension benefit, a spokeswoman said.
A result of these trends is that executive pensions make up a significant portion of total pension liabilities at many companies: 12% at Exxon Mobil and Pfizer....
Companies' retirement liabilities for their executives have also grown through another little-noticed trend: Over recent years, an increasing portion of executives' pay has been postponed, via pension and deferred-compensation plans, rather than given in current paychecks.
Even if a company's liability for executives' pensions totals hundreds of millions of dollars, its employees and shareholders may never know. Companies don't have to report this obligation separately in federal financial filings. A few specify it in a footnote, and some provide clues that make it possible to derive the figure.
The minimal disclosure dates from the late 1980s, when companies first were required to report pension liabilities but were allowed to aggregate all of them. At the time, distinguishing executive pensions was less of an issue because they were smaller. When they ballooned along with executive pay in the 1990s and 2000s, the rules didn't change. Most employers have continued to blend pension figures together.
Perhaps the most significant effect of the limited disclosure is to make it difficult, or impossible, to evaluate company statements about their retirement burdens and the need to cut benefits.
Pension plans, whether for executives or for others, are obligations to pay. In other words, they're debts. And like any debt, they have what amounts to a carrying cost. That carrying cost is part of a company's pension expense.
In the case of pensions for regular employees, the expense is partly or wholly offset by investment returns on money the company set aside in the pension plan when it 'funded' it.
Executive pension plans are different. They're normally left unfunded. They have no assets set aside in them. That means there is no investment income to blunt the expense. The result is that obligations for executive pensions create far more expense for an employer, dollar-for-dollar, than pensions for regular workers.
Further note that both companies withstood share-holder revolts this year inspired by the staggering amounts of compensation given to these CEOs. In the case of UnitedHealth, although the company was doing well financially, the focus was on the $1.6 billion that CEO McGuire had received in stock options (see our post here). In the case of Pfizer, the focus was on the size of McKinnell's compensation package compared with the relatively poor performance of the company's stock (see our post here). Now we discover that both CEOs will also receive amazingly luxurious pension benefits, so large as to constitute a significant drain on their companies' earnings.
UnitedHealth Group's CEO McGuire's lavish salary and benefits (including his pension) should be contrasted with the company's mission statement which includes the goal to "make health care more affordable."
Pfizer Inc. CEO McKinnell's rising salary and lavish pension should be contrasted with the company's stated mission to "greater access to healthcare for people," and "global leadership in corporate responsibility."
Health care in the US (and globally) is afflicted with rapidly increasing costs, declining access, stagnant quality, and demoralized health care professionals. Could health care organizations more focussed on rewarding their top executives then fulfilling their missions have something to do with it? It's not a topic often discussed in health care research and policy circles - but the explanation seems increasingly plausible where I sit.