Why did Rick Wagner fight so hard to avoid bankruptcy? Was it out of altruism or was a little voice in the back of his head saying, “Careful dude, you are going to lose that supplemental ERP pension.” Rick stands to lose $20 million.
Supplemental pension plans have been a feature of the corporate landscape since the Pension Benefit Guarantee Corporation was set up in 1974. Supplemental plans are a way to pay executives pensions that exceed the limits set by the PBGC of $51,750 per year (2008 max) and the Internal Revenue Service cap on the annual benefit under a defined benefit plan under Section 415(b)(1)(A) of $185,000. The Internal Revenue Service limits tax deductible payments to a defined contribution plan to $46,000 per annum.
These limitations don’t affect most people, but for executives at the highest levels of corporate America they represent a material portion of compensation. For example, Lee Iacocca’s canceled supplemental retirement benefit has caused a media storm. Since Lee retired in 1992, and the SEC only started providing filings online in 1995 with the birth of the Internet, I couldn’t figure out what Mr. Iacocca is losing. But looking at my old friend, Bob Eaton, the GM executive who succeeded Mr. Iacocca, Lee is a major loser in the bankruptcy of Chrysler.
In 1997, Mr. Eaton had earned an annual pension annuity of $1.4 million, assuming that he worked until age 65; $830,200 if he retired immediately. This supplement pension annuity cost Chrysler’s shareholders $4,048,068 in 1997. In 1998, Mr. Eaton sold Chrysler to Daimler-Benz Aktiengesellschaft, in a well-timed divestiture that saddled the Germans with massive loses for ten years.
Under PBGC rules, Mr. Eaton can only receive $51,750 per year. Under bankruptcy rules, he must give back his company car and other perks. In 1997, there were 1,250 executives at Chrysler covered by the supplemental plan so this catastrophic loss of income will only impact retiree communities in Florida and the Detroit suburbs.
I guess these annuities will go to pay secured creditors like the US Government.
In the case of Rick Wagner, things are even worse. The supplemental pension benefits at GM “are not pre-funded and are paid out of the Corporation’s general assets.” So there is nothing to back up these obligations at GM and the benefits will be wiped out. As of May 2008, Mr. Wagoner had $19,669,000 in supplemental or ERP benefits that, under the plan, payout over a five-year period post-retirement. Since Mr. Wagoner was let go in March 2009, it appears that he will lose virtually all of this money. Pretty tough medicine and a good reason to resist bankruptcy until the bitter end.
Fitz Henderson, the new CEO, will also be a loser in bankruptcy – standing to lose $3.4 million.
My advice to all you pensioners out there; take a lump sum as soon as you can and put the money in an IRA that belongs to you and that you control.
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One last thought. Going forward, everyone should be converted to a defined contribution plan. Under such a plan, 4% of base pay would be transferred to an individual 401K or IRA every year. Such a plan would be fair to both the company and the employee because both parties would know with certainty what their obligations and benefits are.
If you do the math on 4%, it is a pretty scary number. For a teacher in Dobbs Ferry, it roughly translates into a benefit of $20,000 per year after 40 years of service. Right now, teachers in Dobbs Ferry get 50% of average final three-year salary or roughly $40,000. For the defined contribution plan to equal the current defined benefit plan, the annual contribution to the 401K would need to be closer to 8%.