GAO Report Examines Executive Comp Practices at Firms with Underfunded Pensions

November 20, 2009 ( – 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”.

The rationale for the inquiry was straightforward, as acknowledged by the GAO; “When sponsors terminate underfunded plans during bankruptcy, it can deplete resources of the Pension Benefit Guaranty Corporation (PBGC), which protects the pensions of almost 44 million American workers and retirees who participate in over 29,000 defined benefit pension plans.”   

To identify case study examples GAO analyzed a listing of the 1,246 underfunded plans that were terminated from 1999 to 2008 and selected public companies with large unfunded liabilities, large unfunded liabilities per participant, and a large number of plan participants. GAO reviewed documents provided by companies and executives, and interviewed PBGC and company officials, and also reviewed Securities and Exchange Commission (SEC) filings and PBGC documents disclosing plan underfunding at the time of termination and missed contributions.

What did the report find?  GAO found that 40 executives for 10 companies received approximately $350 million in pay and other compensation in the years leading up to the termination of their companies' underfunded pension plans.  According to the report, GAO identified salaries, bonuses, and benefits provided to small groups of high-ranking executives at these companies during the 5 years leading up to the termination of their pension plans.  The report went on to note that “beyond the tens of millions in base salaries received, GAO found that executives also received millions of dollars in stock awards, income tax reimbursements, retention bonuses, severance packages, and supplemental executive-only retirement plans”. 

Additionally, GAO said that in some cases, plan participants had their benefits reduced due to the underfunding of the plan when it was terminated.  Beyond that, the GAO report noted that “PBGC has no oversight power with regard to executive compensation prior to a company's bankruptcy”. During bankruptcy, executive compensation must be approved by the bankruptcy court, and after this approval PBGC has extremely limited ability to recover those payments to executives.

Worth Noting

Like any other creditor, PBGC can object to specific executive compensation plans, but the final decision regarding such plans is made by the bankruptcy judge, who is responsible for determining whether the plan is justified by the facts and circumstances of the situation, noted GAO.  “For executive compensation paid within the 2 years prior to a company’s bankruptcy petition, creditors have extremely limited ability.”

GAO did draw attention to a couple of factors in preparing the report.  First, GAO notes that it “did not find any illegal activity with respect to executive compensation on the part of either the 10 companies or the 40 executives under review”.  On the other hand, GAO cautioned that the executive compensation figures may be understated because “some company executives could not be located, did not respond to document requests, declined interviews, and did not give GAO access to their tax records”. 

Moreover, airlines and steel – industries that have dominated the list of liabilities carried by the PBGC - represented 50% of the companies evaluated.  Additionally, the list of terminations examined by the GAO included none occurring after 2005, and thus all were prior to the advent of the Pension Protection Act (PPA).