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An employer benefit lobbying group on Wednesday, October 22, urged federal legislators to take a series of steps, including easing rules on pension plan funding to avoid widespread benefit freezes and damage to the nation’s economy.

As part of a 10-point plan, the Washington-based American Benefit Council recommends delaying requirements in a 2006 federal law that gradually require employers over the next few years to fully fund their pension plans, up from a prior 90 percent funded target.

For example, this year, plans that are at least 92 percent funded are considered fully funded, with employers whose plans are funded to at least that level not required to kick in more money, while in 2009 the funding target moves up to 94 percent.

The council is recommending that the 92 percent funding level target be extended through 2009 and that other transitional relief be extended to plans falling below that level.

Other recommendations include giving employers more time to recognize losses in the value of plan assets and more flexibility in valuing plan liabilities.

Those recommendations come as the huge drop in the equities market has resulted in many pension plans becoming underfunded, forcing employers to kick in more money or—if their plans fall below 80 percent funded—stopping future benefit increases.

“The benefits system has never seen this level of concern before. Unless something is done—quickly—massive funding obligations will trigger benefit freezes on an unprecedented scale,” the American Benefit Council warned.

Additionally, since freezing doesn’t eliminate current funding shortfalls, companies will be forced to “direct huge resources to their plans, which will cost many jobs and prevent companies from making essential investments in their businesses,” the council said.

Filed by Jerry Geisel of Business Insurance, a sister publication of Workforce Management. To comment, e-mail editors@workforce.com.

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A repeat of the Spanish flu outbreak of 1918 is expected to cause a global recession on a scope ranging from 1 to 10 percent of global gross domestic product, according to a report released October 17 by Lloyd’s of London’s emerging risk team.

The Lloyd’s report, “Pandemic—Potential Insurance Impacts,” concludes that a pandemic is inevitable, with historic recurrence rates of 30 to 50 years. The report focuses on the impact of a global pandemic on the business community and, in particular, the insurance markets.

The impact on some classes of insurance business, namely life and health, would be adverse, Lloyd’s finds. Many forms of liability covers, including general liability, directors and officers, medical malpractice, as well as products offering business interruption and event cancellation could be triggered, the report states.

“The significant message is that society should not optimize to one particular scenario as a worst case,” said Trevor Maynard, manager, emerging risks at Lloyd’s and the report’s author.

“Much has been said of the 1918 Spanish flu epidemic, which is said to have killed up to 100 million people worldwide. While Avian flu is seen as the most likely next pandemic, we have to ensure we are prepared for other types of pandemics that may require different responses and pose different challenges—some of which may well have higher rates of mortality than flu,” he said in a statement.
 
The full report can be read here.

Filed by Richard Miller of Business Insurance Europe, a sister publication of Workforce Management. To comment, e-mail editors@workforce.com.

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The big bank bailout doesn’t just take aim only at excessive severance packages for top executives of financial companies, as has been widely reported.

The limitations Congress has mandated apply to other elements of bailed-out financial institutions’ pay packages, and they could potentially apply to those of other publicly traded companies in the not-too-distant future.

The provision that may have the greatest impact on financial firms is a new $500,000 deductibility limit that will apply to all forms of compensation for top officers.

Steve Barth, partner at Foley & Lardner, said it’s a major change from current laws, which allow companies to deduct much more of their top officers’ pay for tax purposes.

Currently, he noted, companies can deduct up to $1 million of an executive officer’s non-peformance-based compensation, so this new cap clearly lowers that ceiling on financial institutions.

But now, all forms of performance-based pay—including stock options and deferred compensation—are also subject to the $500,000 cap, confirmed Treasury spokesman Andrew DeSouza.

The first companies that will be subject to this limitation are the nine financial institutions that are receiving a combined $125 billion in equity infusions from the Treasury Department.

These firms—which include Goldman Sachs, Bank of America and JPMorgan—paid their top officers a combined $1 billion in total compensation last year, according to a Financial Week analysis of their proxy filings. Roughly 98 percent of this pay was dished out in the form of incentive awards, such as stock options and deferred compensation, which would have been subject to the new deductibility limit.

“This $500,000 limit won’t prevent these companies from awarding larger compensation packages to their executives,” Barth says. “It just means that they’ll pay higher taxes, which many financials view as a pretty fair trade-off for the cheap equity injection they’re receiving.”

In announcing the $700 billion rescue package for banks, Treasury Secretary Henry Paulson asserted that in exchange for equity infusions, financial institutions will have to agree to such stringent restrictions and provisions governing compensation for their CEOs, CFOs and three other highly paid officers.

Besides the $500,000 limit on total compensation, these companies in the capital purchase program will be required to “claw back” bonuses or incentive payments if a company’s financials are proved to be “materially inaccurate” and recover any portion of the pay that’s based on misstated information.

Also, the Treasury Department’s rules will prohibit these companies from making golden parachute payments to any of their top executives.

Lastly, the rules state incentive compensation payments made to these executives should not “encourage unnecessary and excessive risks that threaten the value of the financial institution.”

All of these rules are sure to draw a significant amount of attention in the coming months, especially since lawmakers have said they’ll use the pay provisions in the rescue package as a template for broader executive compensation reforms they plan to introduce in Congress next year. These reforms would apply to all publicly traded companies, lawmakers have said.

Now, not only do lawmakers have a road map for these broader changes, but they can also use the financial institutions participating in the capital purchase program as a test group to measure just how effective these rules are at reining in massive payouts.

“There’s now some material for an actual analysis,” said Tim Bartl, vice president and general counsel at the Center on Executive Compensation in Washington.

The rules related to clawbacks and golden parachutes are rather innocuous, compensation consultants and attorneys note, because many companies already have policies on both in place.

The rule stating that financial institutions must discourage any incentive payments that are based on “unnecessary and excessive risks” is vague, but it could wind up having a major influence on the types of awards companies use to incentivize executives, such as stock options.

In spirit, the rule aims to get companies and their compensation committees focused on rewarding executives for “long-term and sustained value creation, not fleeting short-term factors that could compromise a financial institution’s health,” said compensation consultant Yale Tauber.

But it remains a question whether companies are supposed to adopt this as a “statement of principle,” Tauber said, or actually apply it to the types of incentive awards they give executives.

“If it’s the latter, maybe it means that these companies shouldn’t be granting stock options to their executives,” Tauber said. “Theoretically, don’t options put you in a position of being a short-term trader, as opposed to a long-term investor?”

Filed by Mark Bruno of Financial Week, a sister publication of Workforce Management. To comment, e-mail editors@workforce.com.

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Public companies are still failing to disclose enough executive compensation data in their filings, according to the Securities and Exchange Commission’s top disclosure cop, who hinted that greater disclosure requirements could be on the way.

Many companies’ compensation disclosure and analysis are sorely lacking in explanations of the targets or the peer groups they use to set executive compensation, a problem that the SEC pointed out last year but that has not been fixed, said John White, director of the SEC’s division of corporation finance. “Rather than moving forward toward better-quality disclosure, [many public companies] are merely treading water.”

Noting that the spotlight is on executive compensation, it is also possible that many companies could have additional requirements thrust upon them, as the Treasury Department’s asset-purchasing program gets under way, White said. That program curtails executive pay in several ways, including capping tax-deductible exec pay and limiting how much risk execs can take as part of their compensation.

Starting next year, the SEC plans to review the annual and quarterly reports, as well as form 8-K reports, from all of the largest financial institutions, for such CD&A disclosures.

“Would it be prudent for compensation committees, when establishing targets and creating incentives, not only to discuss how hard or how easy it is to meet the incentives, but also to consider the particular risks an executive might be incentivised to make to meet the target?” White asked. “To the extent that such considerations are or become a material part of a company’s compensation policies or decisions, a company would be required to discuss them as part of its CD&A.”

Filed by Nicholas Rummell of Financial Week, a sister publication of Workforce Management. To comment, e-mail editors@workforce.com.

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Pinning down the financial markets bailout bill consumed Congress in the waning days of its session this year.

To nail down its final approval, the $700 billion bailout had to be strapped onto a measure that requires equality between mental health and other medical benefits in health care plans that offer both.

When Congress returns to Washington in January, legislators likely will make the faltering economy the top priority, but health care reform will remain in the mix.

Perhaps the first piece of the puzzle was put on the table October 7 by a bipartisan group of prominent senators in health care policy, including Sens. Max Baucus, D-Montana; Charles Grassley, R-Iowa; Mike Enzi, R-Wyoming; and Ron Wyden, D-Oregon.

They introduced a “discussion draft” of legislation that would require companies to disclose on employees’ W-2 tax forms the amount of money they spend annually on health insurance. The idea emanated from a set of hearings designed to prepare Congress to legislate next year on health care.

The bill is designed to enlighten workers regarding how much money their employers spend on health care and its effect on wages. The senators are collecting public comment until December 31.

The initial reaction from the business community is mixed. Diann Howland, vice president for legislative affairs at the American Benefits Council in Washington, says that most members of the organization, which includes more than 200 large employers, already provide annual benefits statements to employees.

She’s concerned that the bill would foist an administrative burden on companies and subject them to liability regarding the tax form. She adds that employers want to increase benefits transparency.

“We share a lot of the same goals,” Howland says of the bill. “It’s a matter of how you get there.”

Kathleen Lester, a partner at the law firm Patton Boggs in Washington, says few of her clients have reacted to the bill. But the senators have the right motivation.

“It’s important for consumers to know what things cost and how it drives treatment options and quality [of care],” Lester says.

Seeking wide input on the part of Capitol Hill was a hallmark of the parity bill. Businesses, insurers and mental health advocates hammered out a compromise over three years that resulted in strong bipartisan backing.

The bill does not mandate mental health coverage. But if it is offered, it must be equal to other medical and surgical benefits in deductibles, co-payments, out-of-pocket expenses, coinsurance, covered hospital days and covered outpatient visits.

The parity negotiation process is a model for larger reforms, Howland says.

“Although it’s painful, it’s a better way to proceed,” she says. “In the end, you’ll get a product that people say, ‘We can support this.’ ”

Among the candidates for the first health measures of 2009 are a bill to establish nationwide standards for the adoption of health information technology, which stalled this year because of privacy concerns and the cost transparency measure.

“We will probably see folks take small steps like that,” Lester says.

—Mark Schoeff Jr.

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Despite deteriorating economic conditions—and expectations that many companies would pay out less to their top officers—chief executives at publicly traded companies of all sizes have seen an increase in their compensation.

According to a study of CEO pay released Monday, October 20, by the Corporate Library, the median total pay package for chief executives at almost 2,000 companies was just over $2 million last year, a 7.5 percent uptick from the year before.

The increase, while one of the lowest in recent years, was still a surprise, noted Paul Hodgson, senior research associate at the Corporate Library, given the economic developments that began crippling companies in the finance and housing industries last year.

“We figured that the across-the-board numbers would have been flat, at the very least, or might have even gone in reverse,” he said. “But at many companies, particularly large corporations, it appeared to be business as usual.”

To his point, the Corporate Library research found that companies in the S&P 500 awarded their CEOs total compensation packages that increased by a median of 22 percent in 2007.

That largesse doesn’t jibe with the overall performance of the companies. Operating earnings of S&P 500 companies actually decreased by 5.9 percent during the year, according to Standard & Poor’s data.

The bump in pay, Hodgson said, was driven mostly by stock option gains that top executives cashed in last year.

Likewise, midcap companies boosted their CEOs’ pay by 15 percent, while small-cap companies only paid their CEOs 5.5 percent more last year than they did in 2006 (the Corporate Library data were based on company proxy filings from August 2007 to June 2008).

A record number of CEOs also received substantial increases last year. In fact, 29 chief executives saw their total compensation increase by more than 1,000 percent.

It does not appear, however, that the executives awarded big pay raises inflated the overall increases in pay. Hodgson pointed out that 25 CEOs saw their actual compensation decrease by 90 percent or more last year, with at least one CEO—Arbor Realty Trust’s Ivan Kaufman—receiving no compensation in 2007.

Filed by Mark Bruno of Financial Week, a sister publication of Workforce Management. To comment, e-mail editors@workforce.com.

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Rising pension costs threaten to eat into the profits of many of the Chicago area’s largest companies as they divert billions of dollars to shore up funds depleted by the stock market swoon.

Aon Corp., Exelon Corp., Abbott Laboratories, Caterpillar Inc., Motorola Inc. and Sara Lee Corp. are among the region’s companies that started the year without enough in their pension funds to cover projected payments to retirees. Those shortfalls almost certainly have deepened, observers say.

Kraft Foods Inc., Allstate Corp., Pactiv Corp. and others whose pension funds were only slightly in the black are likely to be running deficits by the end of the year.

Assessing how the market sell-off has affected individual companies is difficult because they file financial reports on their pension funds only once a year. But new rules require companies to book any pension shortfalls as liabilities on their balance sheets—potentially putting pressure on credit ratings — and to top up the funds at a much faster rate.

“Contribution requirements are going to be much larger and much sooner than they anticipated,” said Rick Pearson, managing principal in Chicago for Towers Perrin, a corporate risk management and actuary consultancy. “This is going to require more cash to get back to a full-funded status.”

Besides squeezing profits, the pension shortfalls come as companies try to conserve cash amid a credit freeze that has shut off access to capital from banks and the bond market. Draining corporate cash pools to bolster pensions leaves less money for shareholder dividends, stock buybacks or investments that could enhance earnings just as a weakening economy puts profits under pressure.

“Companies are going to have to put cash in pensions when earnings are not going to be that great for a lot of them,” said Howard Silverblatt, an analyst with Standard & Poor’s Investment Services in New York.

Signs of trouble are emerging already. Peoria, Illinois-based Caterpillar said last quarter that a decline in asset values in the first half had driven up its unfunded pension liability by an estimated 161 percent, to $2.43 billion. A spokesman last week declined to comment on the impact of the market plunge since then, but at the start of the year, more than two-thirds of Caterpillar’s pension assets were invested in equities.

“We know it’s going to cost them more money,” said Eli Lustgarten, an analyst with Ohio-based Longbow Research.

Aon’s unfunded pension liability could nearly triple to $2.8 billion by the end of the year, said Bijan Moazami, an analyst with Virginia-based FBR Capital Markets Corp. Making up that shortfall could trim per-share earnings by about 25 percent, he wrote in a note to investors last week.

“It’s premature for us to estimate on that,” a spokesman for the Chicago-based insurance broker said. “A lot can happen between now and the end of the year.”

Nearly 350 companies in the S&P 500 index have defined-benefit pension plans, which typically invest about two-thirds of their funds in stocks. At the start of the year, those plans had a combined $1.5 trillion in assets, exceeding obligations by $63 billion.

With the S&P 500 down about 36 percent for the year, analysts estimate that those companies’ assets have lost 15 to 20 percent of their value, leaving a funding shortfall that could approach $200 billion.

Observers expect the ballooning pension deficits to provide additional incentive for companies to continue to curtail or drop traditional pension plans, which guarantee retirees’ incomes. The number of such private-sector plans fell by 34 percent from 1998 to 2005.

Under a 2006 federal law, companies are required to make up unfunded balances within seven years. In the past, they were allowed to spread out payments for pension shortfalls for as long as 30 years. As part of the new law, companies will be forced to limit employee benefits if pension plan assets fall below 80 percent of obligations.

Filed by Bob Tita of Crain’s Chicago Business, a sister publication of Workforce Management. To comment, e-mail editors@workforce.com.

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A large proportion of the nation’s primary care physicians are not prepared to advise patients enrolled in consumer-driven health plans on such issues as coverage limitations and cost considerations, a new survey has found.

In fact, 43 percent of the doctors responding to the survey, which was conducted by the Robert Wood Johnson Foundation Clinical Scholars Program and published Wednesday, October 8, in the American Journal of Managed Care, said they have heard “a little” or “not at all” about consumer-driven health plans, 33 percent reported having heard “somewhat,” and 24 percent reported having heard “much” or “a great deal” about the plans, which generally combine a high deductible with either a health reimbursement arrangement or a health savings account.

Despite their limited knowledge about the plans, 40 percent of the physicians responding to the survey reported having enrollees in such plans on their practice panels, generally comprising about 5 percent of their total patients.

An estimated 5.5 million Americans are enrolled in consumer-driven health plans nationwide, according to the 2008 Employer Benefits Survey released last month by the Henry J. Kaiser Family Foundation and the Health Research & Educational Trust.

Dr. Craig Pollack, a Robert Wood Johnson Foundation clinical scholar at the University of Pennsylvania and a co-author of the study, said physicians’ lack of knowledge about the plans demonstrates that many plan members are receiving little or no guidance from their doctors when making medical purchasing decisions.

The survey, which was conducted anonymously by mail in May and June 2007, asked 528 randomly selected internists, family physicians and general practitioners 65 or younger, about their baseline knowledge and overall impression of consumer-driven health plans; their general readiness to discuss issues of cost, cost-effectiveness and medical budgeting with patients; their ability to advise patients on the costs of commonly prescribed services; their views regarding the effects of the plans on clinical care; and their views on the role of publicly available quality-of-care information in patient decision-making.

Once doctors were provided a brief description of consumer-driven health plans, 46 percent reported a favorable impression, 37 percent were neutral, and 17 percent reported an unfavorable impression. Physicians with patients enrolled in such plans were more likely to have a favorable impression than physicians without these patients, the survey found.

When physicians were asked about their readiness to discuss issues related to cost, cost-effectiveness and budgeting, almost three-quarters said they were prepared to discuss cost (73 percent) and cost-effectiveness (76 percent), but less than half—48 percent—said they were ready to discuss medical budgeting with patients.

Physicians were generally distrustful of quality-of-care information available to members of the plans from government or insurance Web sites, with less than half agreeing that this information should factor into patients’ choice of hospitals or specialists. Less than 21 percent of physicians said patients should trust government Web sites for such information, while less than 8 percent said that insurer Web sites contained reliable health care quality information.

“The AMA is working to better educate America’s physicians about the coverage and cost considerations of consumer-directed health plans,” American Medical Association board chairman Joseph Heyman said in a statement. “A health savings account brochure is available for patients and physicians on the AMA Web site, and we are looking into other ways to better answer physicians’ questions about consumer-directed health plans.”

Business Insurance, a sister publication of Workforce Management. To comment, e-mail editors@workforce.com. Workforce Management’s online news feed is now available via Twitter.

The maximum contribution that can be made to 401(k) and other defined-contribution plans will increase next year, and the maximum benefit that can be funded through defined-benefit plans also will rise in 2009, the Internal Revenue Service announced Thursday, October 16.

The maximum annual contribution an employee can make through salary reduction to a 401(k) plan will rise to $16,500 from $15,500, while the maximum annual catch-up contribution that employees 50 and older can make to 401(k) and certain other defined-contribution plans will rise to $5,500 from $5,000.

In addition, the maximum annual total contribution, including employer contributions, to defined-contribution plans will rise to $49,000 per participant from $46,000.

The maximum annual benefit that can be funded through a defined-benefit plan will increase to $195,000 from $185,000, and the amount of employee compensation that can be considered in calculating pension benefits and contributions to defined-contribution plans will rise to $245,000 from $230,000.

The definition of a highly compensated employee for 401(k) plan nondiscrimination testing purposes will rise in 2009 to one earning $110,000 a year from $105,000.

The 2009 limits are determined by a methodology set by federal law and reflect increases in the cost of living.

Filed by Jerry Geisel of Business Insurance, a sister publication of Workforce Management. To comment, e-mail editors@workforce.com.

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