GAO Report Examines Executive Comp Practices at Firms with Underfunded Pensions

November 20, 2009 (PLANSPONSOR.com) – A new report from the Government Accountability Office (GAO) has some legislators talking about freezing executive compensation at firms that have “significantly underfunded” pension plans. 

The report, requested by Congressman George Miller (D-California), Chairman of the House Education & Labor Committee,  title pretty well summarizes the focus and findings of the report; “Sponsors of 10 Underfunded Plans Paid Executives Approximately $350 Million in Compensation Shortly Before Termination.”

Responding to the report, Miller said ““It is fundamentally wrong that executives were able to line their pockets with millions of dollars from bonuses, stock options and free joyrides on corporate jets, while watching their workers’ retirement security slip into peril,” said Miller. “Executive compensation and golden parachutes should be aligned to the fate of workers’ retirement plan. This will create an incentive for executives to fix workers’ pension plans before they go broke.”

Considering Legislation

“While rank-and-file employees face freezes or cuts in benefits if their pension plan’s liabilities significantly outstrip assets, there are no laws that link the underfunding of workers’ pension plans to an executive’s benefits,” Miller noted in response to the report – and said he is considering legislation that will freeze executive compensation if the company’s rank-and-file pension plan becomes significantly underfunded. 

The GAO report notes that back in 2003, GAO placed the Pension Benefit Guaranty Corporation, or PBGC, on its high-risk list due, in part, to the significant underfunding of large plans in struggling industries.  Only a week prior the PBGC – which insures private pension plans - had ended fiscal year 2009 with an overall deficit of $22 billion (see PBGC Deficit Back to 2005 Level ) - nearly double the $11.2 billion deficit recorded at September 30, 2008. 

In presenting its findings, GAO noted that “given the recent decline in global financial markets and increase in corporate bankruptcies, PBGC’s deficit will likely continue to increase, with implications for PBGC’s financial position. In this context, we were asked to determine what pay and other benefits selected executives received in the years preceding their company’s termination of an underfunded defined benefit pension plan”.