Saturday, March 3, 2007

Pensions (Repost I)...

The Wall Street Journal has a piece on liabilities associated with pensions which is usually used to explain why benefits for workers need to be reduced. The quick take home is that for many large corporations the liability comes not from the pensions for rank-n-file workers but rather from executive pensions. Many companies though report the two as one, making it seem has if the pension for the former is dragging down the company.

Some highlights (really lowlights):
"To help explain its deep slump, General Motors Corp. often cites "legacy costs," including pensions for its giant U.S. work force. In its latest annual report, GM wrote: "Our extensive pension and [post-employment] obligations to retirees are a competitive disadvantage for us." Early this year, GM announced it was ending pensions for 42,000 workers.

But there's a twist to the auto maker's pension situation: The pension plans for its rank-and-file U.S. workers are overstuffed with cash, containing about $9 billion more than is needed to meet their obligations for years to come.

Another of GM's pension programs, however, saddles the company with a liability of $1.4 billion. These pensions are for its executives."

In other words, GM is ending the pension for most of its workers, which it could afford while keeping the pension for its executives that is a liability on the company.

"• Boosted by surging pay and rich formulas, executive pension obligations exceed $1 billion at some companies. Besides GM, they include General Electric Co. (a $3.5 billion liability); AT&T Inc. ($1.8 billion); Exxon Mobil Corp. and International Business Machines Corp. (about $1.3 billion each); and Bank of America Corp. and Pfizer Inc. (about $1.1 billion apiece).

• 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."

And this:
"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.

A company's pension expense is something it has to subtract from its earnings each quarter. The cost of executive pensions, having no investment income to cushion it, hits the bottom line with full force."

Basically- executives per dollar of pension benefits costs the company more than a regular worker yet it is the pension of the latter group that is getting cut. Those that are the richest and who least need a pension get to keep their expensive pensions while workers are loosing their less expensive pension. Talk about living in loony world. Of course the reason this goes on, the executive pensions are for those who run the company. They are the ones deciding who gets what pay. Why would they cut back the money they make? In theory Board of Directors are supposed to keep this in check, though most of them are executives for their own companies. In other words they have incentive not to rock the boat. They are benefiting the same way.

"Companies generally are also free to alter, freeze or end regular employees' pension plans, unless a union contract is involved. But executive pensions often are protected from management interference by employment or other contracts."

In other words, workers to protect themselves need to unionize. It is the best protection your pension will have because the executives would love to raid it and give it to themselves.

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