Upfront: Executive Pensions Under Fire

The nonqualified pension benefits of top executives at financially troubled companies are coming under fire by the U.S. Congress. A provision has been embedded into legislation strengthening the federal safety net for private pensions that would bar companies in financial difficulties from setting aside any special funds for people covered by the company's executive retirement plan if their employee pension plans weren't adequately funded. The provision would possibly kick in when such a plan is funded at 60 percent or less of its projected liabilities. But any new rule may apply only to the highest-ranking executives. Nonqualified deferred executive compensation plans at many companies include middle managers, who could be unaffected.

Some members of Congress blame the trend of freezing or terminating defined-benefit plans on the proliferation of executive pension plans. Their argument is that there's little incentive for executives to maintain defined-benefit plans for employees when they have their own rules for putting aside retirement money.

Benefits consultants warn, however, that the proposed changes could cause the cancellation of even more defined-benefit plans because companies that don't have such plans would be able to keep paying into executive plans even when financial problems arose. "The most dramatic impact of the proposed pension legislation may be the continued erosion of the provision of benefits to the rank and file through defined-benefit plans as we see more employers switching to defined-contribution plans," says Laraine Rothenberg, a lawyer specializing in employee benefits at Fried, Frank, Harris, Shriver & Jacobson LLP, a law firm in New York City.

What impact would new pension legislation have on shareholders? Executives might opt to leave an organization more readily if they sensed it was heading into trouble, because they would no longer have incentive to stay once the company filed for bankruptcy. Says Kenneth A. Raskin, worldwide head of the executive compensation, benefits and employment law practice at New York City-based law firm White & Case LLP, "Overall, it's likely that the new legislation may backfire, because if you lose top executives who possess most of the company's knowledge and an intimate understanding of its strengths and weaknesses, it will be that much harder for a troubled company to emerge intact. The end result will be that shareholders will lose more than they will gain by the new rules."