DEEP STRATEGIC WEALTH

  • Strategic Wealth Management

    Integrated Corporate & Personal Wealth Management

  • Strategic Wealth Management

    Integrated Corporate & Personal Wealth Management

  • Strategic Wealth Management

    Integrated Corporate & Personal Wealth Management

  • Strategic Wealth Management

    Integrated Corporate & Personal Wealth Management

  • Strategic Wealth Management

    For Business Owners, Executives and Incorporated Professionals

Supplemental Executive Retirement Plan Funding & Cost Recovery

Far beneath the all-too-familiar North American pension crisis, there lurks a shadow crisis, related to Supplemental Executive Retirement Plans (SERPs).

Supplemental Executive Retirement Plans are a necessary component of executive compensation and a fact of life in North America. They help both public and private sector corporations attract and retain the necessary key executive talent.

There is a lot of concern that these SERPs are very costly, as are the bank standby letters of credit used to secure them… and those costs are rising.

In today’s rapidly changing global environment, a number of adverse elements have aligned, challenging the status quo… causing organizations to re-examine how they can optimize funding and management of their unfunded SERP obligations.

These challenges are affecting most major organizations, running the entire spectrum… from mere annoyance, to existential threat.

Public and private sector organizations and PPPs are under pressure. approaching a tipping point… and searching for a New Paradigm.

Now there’s a new approach…

E. & O. E.

In Defense of the One Percent

Most Canadian Executives have good reason to want to fund, or at least secure their Supplemental Executive Retirement Plans (SERPs).

In this age of uncertainty, it makes sense for executives to want to secure their unsecured SERP Promise.  With the global financial crisis,  Quantitative Easing ad infinitum,  parabolic US spending/debt, US flirtation with debt default and the demise of USD hegemony, the RoboSigning and LIBOR Scandals, the rise of the total surveillance state, and black swan events now commonplace, it just makes sense.

Executive Compensation Under Siege

Executive compensation has been under siege by the press, activist shareholder groups and proxy solicitation firms along with other stakeholders, including utility ratepayers in particular.

SERPs have recently suffered a legal blow from the Supreme Court of Canada.  In Sun Indalex Finance, LLC v. United Steelworkers, (“Indalex”), The Supreme Court ruled that SERP members were unsecured creditors of the firm, ranking behind secured creditors in CCAA insolvency proceedings.  Executive SERP members lost supplemental pension entitlements.  Grant Forest Products executive SERP members recently suffered a similar fate.

Securing the SERP Promise

 Its all fun and games until someone loses their supplemental pension benefits.

There are many legitimate reasons why Executive SERP members might want to fund and secure their SERP promise.  It does not necessarily mean they believe the organization might not be a going concern, or be unable to meet its obligations.

The Indalex SERP was underfunded and unsecured.  In his Affidavit, Keith Carruthers, a former division President and Indalex employee of 27 years, describes how he had expressed concern about the security of the Supplemental Pension Plan.  After Indalex entered CCAA proceedings, Carruthers and the rest of the Executive Plan Members lost 100% of their SERP entitlements, and up to 80% of their total pension benefits.

The Indalex decision has made unsecured Executive SERP members and all DB Registered Pension Plan members more vulnerable in insolvency proceedings.

SERPs are real obligations of the Corporation to the C-Suite and executive SERP members, as are DB Pension Plan obligations. Most SERPs in Canada are unfunded and unsecured, representing little more than a promise.

As we are witnessing a steady stream of large scale financial implosions, many private and public sector/sovereign entities appear poised to renege on their pension promises. Motor City is one of the more notable recent slow motion car crashes to hit the wall.

In Canada, C-Suite and Executive SERP Members would be wise to buckle-up.

The War on Executive Compensation

A quiet war has been brewing in corporate Canada: a conflict over Executive Compensation, which is perceived by many to be excessive. There have been clear winners and losers.  And it is spilling out into the streets.

The press and political interest groups have opportunistically marshaled public and shareholder opinion against executive management and what they paint as obscene levels of compensation, fueling and feeding on the politics of envy. Bonuses, stock option plans, golden handcuffs, hellos, parachutes, & handshakes, along with top-hat supplemental pension plans/SERPS have become lightning rods for dissident shareholder/stakeholder groups.

Further fueling the sense of disparity was the US government bailout of Wall Street and the big money-centre banks, which left fat Wall Street bonuses largely unscathed.

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The financial press are focused more than ever on executive compensation and SERPs, especially those relating to utilities. Why? Because of shareholder activism and the public’s growing annoyance over the ever-increasing cost of utilities. Caught in this turmoil are the Executive SERP members, concerned over the “security” of their retirement.

Whether particular C-suite execs are overcompensated is subject to debate, especially where stakeholders are unhappy with performance and footing the bill.

One certainty is that shareholders now have new weapons to bring to bear upon their boards, compensation committees and executive management groups, such as:

  • the advent of “Say-on-Pay”;
  • the emerging CEO Pay Ratio scheme; and
  • the rise in shareholder activism on the part of powerful proxy advisory firms.

Stakeholder groups have already begun to use these new weapons effectively.  Barrick Gold, Toronto Hydro, B.C. Hydro, Astral Media Inc., Shaw Communications, Air Canada, Nova Scotia Power and Emera, are just a few of the high-profile companies that have recently been on the receiving end of shareholder/stakeholder wrath with respect to executive compensation.

Executive Pensions: The New Front

With conventional pension entitlements in jeopardy as a result of the Pension Crisis, a new focus of shareholder discontent has been supplemental executive pensions.

Most SERPs in Canada are completely unfunded and unsecured.  The scope for managerial discretion and conflict of interest, coupled with  large dollar amounts, and the lack of transparency have caused stakeholders to feel that C-suite execs are writing blank cheques to themselves, leaving stakeholders on the hook. And those cheques are getting bigger.

Risk Management and Cost Recovery on the Horizon

New tools and financial structures are becoming available to de-risk balance sheets and reimburse shareholders for the cost of executive SERP benefits, while funding and securing SERPs. Adoption of some of these measures may bring a de-escalation in stakeholder hostility towards the SERP component of executive compensation.

 

 

E. & O. E.

The Pension Puzzle: Setting the Stage

Public and private sector defined benefit (DB) pension plans in Canada are facing a crisis.  Most are woefully underfunded.  The crisis has been created primarily by demographics – the inverted demographic pyramid and increased longevity risk as a result of longer life expectancies.  It has been exacerbated by many factors including increased entitlements, the global financial crisis, the Federal Reserve Board’s prolonged low or zero interest rate policy (ZIRP), volatile investment returns & anaemic growth, and a high level of subsidized early retirement pensions.

The resulting pressure to reduce benefit entitlements, and implement pension reform has led some firms to close their DB plans to new employees, move to defined contribution (DC) plans, or explore various new risk sharing regimes, a.k.a. “pension reform”.

Beyond these solutions, a few plan sponsors are looking at more surgical options such as pension de-risking, whereby the corporation attempts to lay-off all or part of its pension funding risk using annuity buy-ins, buyouts and longevity swaps with an insurance carrier or other counterparty.  These solutions are at best incomplete, messy and expensive.

More comprehensive and elegant funding solutions that are accretive to shareholder value are on the horizon.

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