Boards shift away from traditional pensions

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New CEOs at some of Canada's largest companies are losing their executive pension plans as the trend of declining pension coverage spreads from ordinary workers into the executive suite.

Several recently appointed chief executives, including Guy Laurence at Rogers Communications Inc. and Hal Kvisle at Talisman Energy Inc., did not get traditional defined-benefit pension plans when they took over the top job at their companies even though their predecessors had them. Other companies, including Shaw Communications Inc., have recently said their executive pension plans have been closed to future hires.

The trend is still modest, with 50 per cent of CEOs at Canada's 100 largest companies still receiving traditional defined benefit (DB) pensions – which pay a guaranteed benefit in retirement – at the end of 2013, a number virtually unchanged from 49 per cent five years ago. The composition of the top 100 companies in the survey changes each year depending on market capitalization, so small shifts are not always evident.

But executive compensation adviser John Hammond, who heads the compensation practice at Towers Watson, said he is seeing CEO pensions becoming less prevalent as companies assess the high costs and funding volatility of DB pension plans.

The trend is advancing slowly, however, because if pensions are eliminated, it only happens when new CEOs are external hires who don't already belong to a company plan, Mr. Hammond said. The pensions are often replaced by defined contribution plans, which work like investment savings plans that do not pay a guaranteed level of compensation in retirement.

"The prevalence of DB programs in terms of new entrants to plans is on the wane," Mr. Hammond said. "From a cost management standpoint, it's more predictable and less of a liability. You'll see programs for existing incumbents that will run their course, and then new entrants coming into a defined contribution scheme."

Concordia University professor Michel Magnan, who specializes in executive compensation issues, said he believes some companies are eliminating CEO pensions for reasons of "optics" to appease shareholders, but are spending much of the savings by boosting grants of share units or options to compensate executives for not having a pension.

"I think what we're seeing … is a shift of money into things that look better in terms of optics, but at the same time are increasing the magnitude of the performance-based [pay] package," he said.

The Canadian Coalition for Good Governance, which represents most of Canada's largest institutional shareholders, has been slowly pressing companies to justify having expensive DB pension plans for CEOs who can easily save on their own for retirement, said executive director Stephen Erlichman.

"Often we see very generous pension entitlements for retiring CEOs, and the comment we make is, 'Look, you're paying your CEO very well during employment, so why do you believe it is necessary to pay the CEO these very generous retirement amounts,'" Mr. Erlichman said.

He said many companies have told the CCGG they will review the pension the next time they change CEOs.

Shareholder pressure helped play a role in one of the earlier examples of a high-profile CEO not receiving a DB pension plan. George Cope, who took over at BCE Inc. in 2008 following the departure of Michael Sabia, did not receive a DB pension as investors pressed for changes to compensation traditions at the telecom company.

Mr. Sabia had become CEO of BCE in 2002 and received a pension that included hugely accelerated pension credit for each year worked. He departed after just six years on the job with almost 30 years of credited service, an annual pension of $968,750 and a pension with an estimated funding obligation of $14.9-million for BCE.

In 2005, while Mr. Sabia was still CEO, BCE announced all future executives – including Mr. Cope – would be covered under a DC pension plan. BCE recently reported the balance in Mr. Cope's DC account was $4.6-million as of Dec. 31.