The great risk shift, yet again

by John Q on August 5, 2008

The Wall Street Journal has a fascinating article about how corporations like Intel are loading up their general pension funds with obligations to pay massive “supplemental” benefits to senior executives. It’s partly a tax dodge, and partly an example of what Jacob Hacker has called the great risk shift. The extra liabilities increase the risk that the fund will fail, but the top brass can be protected against this eventuality with a trust fund, while the rank and file get to take their chances.

Update To clarify, in response to comments, the pension entitlements of ordinary workers are supposed to be protected by the government through Pension Benefit Guaranty Corporation, and to the extent that this works as expected, risk is shifted to the PBGC rather than to workers. But as both the WSJ story and the discussion below make clear, things don’t always work as planned. Some benefits paid to ordinary workers turn out to be classed as supplemental and therefore lost when the scheme fails.



Slocum 08.05.08 at 12:37 pm

The extra liabilities increase the risk that the fund will fail, but the top brass can be protected against this eventuality with a trust fund, while the rank and file get to take their chances.

But to the extent that it’s a risk shift, it’s really more of a risk shift to taxpayers than to the rank-and-file — because rank-and-file sized pensions are insured by the PBGC whereas executive-sized pensions are not. That said, it all sounds to me like much more of a tax dodge than a risk-shift (given that Intel added the cash to the pension plan to cover the increased obligations).


Barry 08.05.08 at 12:57 pm

[I’m working from various newspaper articles on pension fund failures over the years]

Except for the fact that when a pension fund fails and is taken over, the pensions are cut. IIRC, people can lose from 30-50% of their pensions.


Barry 08.05.08 at 12:58 pm

This just confirms my belief that we really, really need to set up a bank of guillotines on Wall Street, and keep them running 24/7 for the first 100 days of the Obama administration.


Slocum 08.05.08 at 1:27 pm

Except for the fact that when a pension fund fails and is taken over, the pensions are cut. IIRC, people can lose from 30-50% of their pensions.

No — pensions are guaranteed up to a limit, not on a percentage basis. Which is why lower-paid workers do not lose when the PGBC takes over but people like airline pilots do.

But in fact, what is unusual about Intel is that they even have a defined benefit pension plan — fewer and fewer private employers do. Mostly defined plans are now found in the public sector, and these funds are seriously underfunded (governments are much worse at enforcing rules — adequate funding requirements in this case — on themselves than on private companies). Elected officials at all levels have made extravagant promises to public employee unions that are going to have to be paid by taxpayers who, themselves, lack such pensions. If you’re looking for the next big pension blow-up, that’s where to look.


abb1 08.05.08 at 2:21 pm

Each and every time I was working for a private company with a pension plan in the US it was like this: here’s the rules for your pension plan, and for the managers we have a different set of rules. It doesn’t even strike me as odd anymore; I remember it used to.


Thomas 08.05.08 at 2:27 pm

I don’t think this is a risk shift. If the extra liabilities for the executive benefits are not funded with additional assets, then the plan is at greater risk of insolvency, but the executives are the ones most likely not to receive their benefits. If anything, this sort of tax dodge provides additional incentive for the executives to make sure that the pension plan is fully funded and sound–their eggs are in the same basket as everyone else’s. (It’s the alternative sort of arrangement that uses a rabbi trust to fund the executive benefits. I don’t believe you can protect the executives with a trust inside the plan. )


LizardBreath 08.05.08 at 4:22 pm


Are you sure about that? My mother certainly believes herself to have lost a large portion of the value of her TWA pension as an ordinary flight attendant (while I don’t remember the details, I think in the end she got a smallish lump sum rather than a pension) despite a PBGC bailout. I don’t know the details, so I or she could be confused, but I’m surprised by what you say.


LizardBreath 08.05.08 at 4:27 pm

Look at this quote from the article:

Consolidated later filed for bankruptcy and handed its pension plan over to a government insurer, the Pension Benefit Guaranty Corp. The PBGC commits to paying pensions only up to certain limits. Mr. Paulsen said he and other executives have been told they won’t get their supplemental pensions.

Some lower-level people will lose benefits, too. Chester Madison, a middle manager who retired in 2002 after 33 years, saw his pension fall to $20,400 a year from $49,200. Mr. Madison, 62, has taken a job selling flooring in Sacramento, Calif.

Certainly looks as if average employees can lose pension benefits despite a PBGC bailout.


Barry 08.05.08 at 5:00 pm

“…saw his pension fall to $20,400 a year from $49,200.”

But under SlocumMath, it’s not a drop/he was too highly paid/it’s the price for a Strong American Economy.

It never ceases to amaze me, how any right-wing move has hords of willing wh*res eagerly supporting it.


SamChevre 08.05.08 at 7:23 pm

Pension rules are really tricky; slocum is right in theory, but not necessarily in practice.

First: what workers understand themselves to be promised, and what the pension rules say they are promised, aren’t the same. Say that your pension plan is 2% of salary per year of service, paid on final year’s salary. Say that you work for the same company for 30 years, but it’s bought by GE after you’ve been there for 20 years; it’s pension plan is terminated, and replaced with the GE plan which is also 2%/year. You retire making $60,000, so your pension is $36,000–right? No. You get 40% of what you were paid when GE bought the company (say $40,000), and 20% of the $60,000–$28,000. (This is the main way Jack Welch made a fortune). Similarly with LizardBreath’s mother; most likely, she got the present value of whatever pension she would have gotten if she had quit the day the pension plan was terminated.

Second: supplemental benefits, like early retirement and health benefits, don’t get PBGC protection. That’s almost certainly where Chester Madison (in LizardBreath’s example) lost out; he’d retired early with both an early retirement subsidy and full pension early, and his pension was re-calculated down to the base level without the early retirement subsidies. (It looks to me like he was getting a subsidy until he was eligible for Social Security equal to his estimated Social Security benefit; that’s a common setup.)

Pension offer all kinds of ways to screw workers over. HOWEVER, this doesn’t appear to be one of them. This is a way to screw over taxpayers, not lower-paid employees.


Thomas 08.05.08 at 7:28 pm

Mr. Madison’s pension is at the statutory maximum. If you think that a pension income of $49,200 at age 56 is something the “average worker” receives, I think you’re mistaken.


SamChevre 08.05.08 at 7:50 pm

Thomas is right; I missed that. has a handy chart of the maximum guaranteed benefits.


virgil xenophon 08.05.08 at 8:53 pm

What is under discussion here is what is technically known in IRS terms as “non-qualified deferred compensation,” the whole purpose of which is to allow corporations to flexibly “discriminate” among key executives so as to reward and retain key management personnel in a manner totally separate from the basic pension pkg as a supplemental bonus. All of this is approved by Congress with the underlying rationale being an acknowledgment of simple good business practices. If the compensation is to be funded out of either the corporate cash-flow or general pension assets and the corporation goes Tango Uniform (“tits up” for you non-military types) the exec. is left holding the proverbial bag. However if the deferred compensation pkg is corporate funded by purchase of an annuity, cash-value life insurance or Bank CD of sufficient size to fund the compensation agreement, then the death of the corporation is immaterial, as the funding for the stream of deferred salary cum retirement income is safely in place separate and apart
from corporate/pension laws and regulations.


virgil xenophon 08.05.08 at 9:04 pm

PS: And yes, the financial instruments funding the deferred compensation often require some sort of a trust agreement–although
some companies using life insurance or annuities as funding mechanisms use the corporate ownership of policy with exec as the beneficiary as sufficiently legally binding in and unto itself.


Thomas 08.05.08 at 11:31 pm

The update doesn’t clarify. The pensions of “ordinary” workers are protected by the PBGC, to a maximum amount. If a pension plan fails because it is underfunded, the executives, just like “ordinary” workers, receive benefits up to the maximum amount, but no more.

Take the Consolidated Freightways situation discussed in the WSJ article. The plan was underfunded prior to the addition of the executive benefits. The executive benefits were entirely unfunded prior to moving them to the pension plan. Moving the executive benefits to the plan guaranteed the executives they would receive some benefits, up to the legal maximum, because of the PBGC guarantee. The alternative to moving the benefits to the plan would be to fund the executive’s retirement benefit with a trust. In that case, the executives would receive the full amount of their pension (up to $139,000 per year). The PBGC maximum in 2008 is around $50,000 per year for a 65-year old, with reduced amounts paid for those retiring at a younger age. Mr. Paulsen, CF’s former COO, says in publicly available court filings that “At retirement, his pension benefit was $9,755.21 per month. Upon takeover of the CFC Plan by PBGC. his benefit was reduced to $1,876.02.” That amount is less than Mr. Madison’s pension benefit, for those keeping score.

To the extent that companies do what Hartmarx did–move the executive’s retirement benefits to a pension plan, and then conditionally fund a trust in the event that the plan fails, there is no increased risk to the PBGC. The PBGC would not be paying the benefits, because they would be funded by the trust. In the Hartmarx case, unlike the CF case, the only effect is reduced tax liability for Hartmarx.

It seems to me that we would want companies to put their executives in the same boat with ordinary workers. We should prefer CF’s course of action to Hartmarx’s, because when companies do what CF did, executives are incentivized to make sure that the pension plan is sound.


virgil xenophon 08.06.08 at 2:32 am

Following on Thomas, the reason Consolidated Freightways felt compelled to move the “unfunded” executive “benefits,” i.e., the unfunded deferred compensation contracts, was the fact that CF had tried to (a)get by on the cheap by not purchasing a funding instrument
to insure contract payout, and (b) thinking “a” was possible/permissible from a fiduciary standpoint by over-estimating their future growth patterns and thinking that their future business operations would have generated profits sufficient to pay those contracts out of corporate cash-flow. Hence the move to fold those contracts into the general pension plan. The moral here for corporate executives is that the next time an insurance agent comes calling to suggest ways to fund their deferred compensation contracts, they should listen. If the CF execs had(as they obviously did not) the execs. would have been made whole without screwing the tax-payer via PBGC payout if the plan folds.

I quite frankly don’t understand your logic Thomas. Most executives
are hardly in a position to affect/influence pension-plan funding, design and due-diligence except “en grosso mondo,” as it were, by dint of contributing to superior company performance overall. However, changing market conditions can swamp even the most efficiently-run companies, so wouldn’t a fully-funded executive benefit plan separate from the general pension plan insure that it is corporate dollars, and not general tax-payer dollars that are paying these benefits in time of default? Thus I would think the Hartmax way is much to be preferred as long as the benefits are pre-funded from corporate assets, i.e., the tax-payers at large don’t get screwed
by having to ante-up.


Thomas 08.06.08 at 3:18 am

Virgil, CF’s management didn’t spend CF’s money to secure their own retirement, and instead they transferred CF’s liability for their retirement to an insured pension plan, in the process providing tax benefits to CF. If, as you would have had it, the execs would have fully funded their own retirement instead of transferring the liabilities to the pension plan, then they would be enjoying a very nice pension right now. But the rest of CF’s workers participating in the plan? They’d be just about where they are now. When the plan went bust, the PBGC announced that ” the Consolidated Freightways Corporation Pension Plan has about $228 million in assets to cover $504 million in promised benefits. ” I haven’t reviewed the financial statements for the plan, but I’m guessing that the eight executives CF added to the plan in 2001 didn’t cause all of that shortfall. The CF execs could have taken care of themselves without taking care of the rest of the CF plan participants, but I confess I don’t see how that would be better.

As for the rest: The taxpayers didn’t pick up the tab; the PBGC did. I do think that executives have more influence over pension plan funding than you suggest. And to the extent that there is room for judgment, I think that it would be better for “ordinary” workers if the executives actually had a stake in whether the pension plan was going to be able to make its promised payments. Hartmarx’s plan doesn’t put the execs in the same place as the other plan participants–they’re in a funded position in the plan goes bust. So–besides their fiduciary duty to plan participants and whatever moral obligations they might feel toward their employees–why would they care if the plan were to go bust?


virgil xenophon 08.06.08 at 6:16 am

Thomas: When you state that “the taxpayers didn’t pick up the tab; the PBGC did,” I have to ask: Who do you think stands behind the PBGC? And is not it’s direct funding ultimately paid for by the resultant output of all the workers in corporations only once removed?

The entire rationale for supplemental funding for key executives is to sweeten the pot with a mechanism that is totally flexible and with the provision for unlimited funding above and beyond the strictures of ERISA and it’s limits on “top-heavy” plans for the big kids. The top-heavy strictures, you may remember, were instituted in the late 70’s to prevent one-man Corporations like physicians to use the pension plan as their personal bank account. This was especially tempting in those days as social security was integrated into the pension rules under the theory that one did not have to make pension contributions for anyone whose salary had not risen above the SS taxation limits–as the employer was in effect funding both the employee and employer match–and the SS funding alone was held to be enough of a pension contribution by the employer, it was once believed. This feature, of course, allowed many Physicians in particular to avoid any pension contributions at all for most office staff as their salaries fell below the upper limits of exposure to the social security tax. Several well-publicized abuses of this situation led to the “top-heavy” rules for limits to pension contributions.

But while such limits were more or less effective for one-man PSC’s.
it severely limited the ability of large corporations to reward key personnel for their performance above and beyond their base salaries due to the nature of their work and the fact they were not hourly employees under union contract, but salaried management types.
Hence deferred compensation to provide a tax advantage to them and flexibility to the corporation to help retain key personnel. What you have to understand is that you don’t want to kill the goose with too many strictures, because if you do the math, corporate leaders would come out better with more cash personally by doing away with pensions, taking the cash flow previously used to fund the pension, paying the tax upfront, and going to Vegas with the huge chunk left over. And believe me, that’s where we’re headed. Medical first, then pensions, with the general taxpayer ultimately on the hook for it all.

Again, back to the case of CF, I am at a loss to understand why, if under either scenario, the workers “would be just about where they are now” as you say, you would prefer that a further strain be put on the PBGC to pay those executive benefits when CF could have handled it (if it had the foresight to pre-fund) with private dollars. Limiting the executives’ pension by rolling them into the basic plan
wouldn’t improve the state of the worker bees one whit, so why play dog in the manger? Why can’t the executives have the full sum they’ve earned via a separate trust if it won’t make a difference to the hourly employees one way or the other and saves the PBCG money to boot? Color me confused or terminally dumb. (Don’t bother to answer that, I already know the reply–as my wife so often reminds me–she tends to “both and”)


SamChevre 08.06.08 at 1:24 pm

Again, back to the case of CF, I am at a loss to understand why, if under either scenario, the workers “would be just about where they are now” as you say, you would prefer that a further strain be put on the PBGC to pay those executive benefits when CF could have handled it (if it had the foresight to pre-fund) with private dollars.

Here’s why I’d prefer it.

The difference to the PBGC is very slight, because the portion of the executive pensions that is guaranteed is very small.

The difference to the executives is huge; with pre-funding their benefits separately from the regular employees, they are fine even if the regular employees are not. (Note well: regular pension are supposed to be pre-funded; that’s what a pension plan is–the pre-funding mechanism.) If the executive benefits are pre-funded in the pension plan, the executives lose more than the regular employees if the pension plan defaults.


virgil xenophon 08.06.08 at 4:36 pm

SamChevre: Unions loved defined benefit pension plans because (a) the “defined”part of the benefit was a firm number the unions could barter over and (b) they thought they were shifting the entire investment risk to the company. That is, they didn’t care if the company invested in baseball cards, as long as the dollars were there at retirement time. Their major error, however, was the assumption that the company would always be there. And in this regard, the ultimate “risk” (that the company would be there) is shifted back onto the worker. It was the Unions, after all, that chose to eschew a “money purchase” or Defined Contribution plan that was truly money in the bank because of the unknown amount at the back-end final payout that was a hard sell for the membership and impossible to bargain over, as the Union could not possibly fold daily investment decisions into a collective bargaining agreement the way they could a single number–the monthly retirement benefit agreed upon under the defined benefit plan.investment risk. What this did, however, was allow the company wide latitude in interest rate assumptions such that by simply “assuming” a higher rate of return on investments, one could declare the plan assets in their current state “over-funded” and absolve themselves of any plan contributions for that year or several years–thereby saving the company a ton of cash flow. If, however, those “assumptions” are proved wrong, the Company is supposed to make up for it with larger contributions in the future to make the “defined” number required at retirement time–but if “in the future” the company suffers hard times and can’t fund the make-up contributions, then the pension is under water.

My point here, is that the Union chose its own poison, and eschewed a plan that would have required the company to make a yearly set contribution of real dollars(not paper “assumptions”) come hell or high water,i.e., the defined contribution plan. That was their choice, so why should the management executives be penalized for that? Management types are just that, management, not union. The plan is the union’s, not management’s. The Union chose to have a plan (the Defined Benefit Plan)that did not require hard dollar pre-funding all on their own accord. They made their bed, now let them lie in it. (Although I should say that management was all too willing to go along with it as it allowed them to control the timing and amount of contributions, which gave them a flexibility with corporate cash-flow
that the defined contribution did not.)

So—–Sam, why should the executives be forced to have a plan the union designed–they are not union are they? It seems to me that management is well within it’s rights to do whatever it wants for management as opposed to the hourly workers–that’s the whole point
of salaried vs hourly workers under separate collective bargaining, is it not?

Comments on this entry are closed.