CEO pension costs balloon amid longer lifespans, lower discount rates

Pensions are helping to fuel a jump in average chief executive officer pay — and the reason is largely out of companies' control.

Standard & Poor's 500 Index companies that have filed proxy statements for fiscal 2014 contributed an average $1.5 million to their CEOs' pensions, compared with an average of about $550,000 in 2013, according to data compiled by Bloomberg. Pensions comprised about 11 percent of total CEO pay at those companies, compared with 4 percent in 2013.

Ballooning pensions often were triggered by preset agreements on CEO retirement pay, rather than new decisions by boards to give their executives more. Longer lifespans and lower discount rates are forcing companies to add more to their CEOs' pensions to meet return expectations and support future payouts, said Steve Seelig, an executive compensation consultant at Towers Watson & Co.

“This whole question about pension values is coming up simply because it's rising so much due to things that aren't really design related,” Seelig said.

Corporate pensions provide retirement benefits that are derived from an employee's compensation and years at the company. The board of directors agrees to grant a set plan to an executive that often pays out in installments upon retirement. Contribution calculations take into account how long a CEO may live and a discount rate set by accountants and the companies.

The pension data was culled from about 260 S&P 500 companies, at which average CEO pay was $13.6 million in 2014, compared to $12.5 million in the year earlier, the data show.

At least 60 companies have more than doubled the amount of money added to their CEOs' pensions since 2013. U.S. Bancorp, PNC Financial Services Group Inc. and Honeywell International Inc. have increased their contributions to CEO pensions this year more than elevenfold.

The Society of Actuaries, which last updated its mortality tables in 2000, said in October that women and men are expected to live about two years longer than had been estimated, which would require companies to make pension payments for longer periods. That led Aflac Inc. to boost CEO Dan Amos's pension contribution more than fivefold to $6.8 million in 2014, according to its March 19 proxy filing. The jump accounted for more than one-third of his $15.5 million total pay, according to the Columbus, Ga.-based company's summary compensation table.

“The change in pension value was driven largely by the adoption of the updated mortality tables,” Aflac said in the filing. “The tables increased life expectancy for both males and females.”

U.S. Bancorp said in its proxy that the “single biggest factor” causing the surge in CEO Richard Davis's pension and non-qualified deferred compensation earnings to $8.2 million from about $70,000 was a decline in the discount rate to 4.13 percent from 4.97 percent, according to a March 12 filing.