Last Friday, I blogged “We All Hate to Say, ‘I Told You So,’ But…,” noting the potentially dramatic impact of changes in actuarial assumptions on NEOs’ pension benefits in the “Change in pension value and nonqualified deferred compensation earnings ($)” column of the Summary Compensation Table and in the Pension Benefits Table (following up on a January blog: “Warning to Public Companies with Defined Benefit Pension Plans”).
Over the weekend, I had an opportunity to more closely review the GE proxy, in which I observed that GE anticipated the potential optical issues associated with the change in pension value for this year and put together a number of extra proxy disclosures to help deal with this. I have provided the relevant proxy excerpts below.
Other companies facing this artificial increase in pension values because of the quirky change in actuarial assumptions last year should consider reviewing this useful disclosure language.
1. Explanatory disclosure quantifying the impact of changes in the pension valuation assumptions:
Proxy Summary and CD&A (pp. iv and 18)
SEC TOTAL COMPENSATION SIGNIFICANTLY IMPACTED BY CHANGE IN PENSION VALUE ASSUMPTIONS. Excluding the effect of the change in pension value, Mr. Immelt’s compensation for 2014 was $18.8 million, down 2% from 2013 (salary and bonus increases were offset by a 20% lower aggregate grant date fair value for his equity grant). However, Mr. Immelt’s SEC total compensation for 2014 was $37.2 million, driven by an $18.4 million increase in pension value (compared to $0.6 million in 2013). 52% of this pension value increase is the result of two completely external factors. The first factor is a change in the discount rate reflecting historically low interest rates. The discount rate has ranged between 3.96% and 7.75% over the last 20 years, and at the end of 2014 was at 4.02%. A 100 basis point change in this discount rate would have impacted Jeff’s theoretical pension value by more than $8 million for 2014. The second factor is the Society of Actuaries’ recent issuance of new mortality tables projecting longer life expectancies.
Footnotes to Summary Compensation Table (p. 22)
This column shows the sum of the change in pension value and above-market earnings on nonqualified deferred compensation, which break down for each named executive as shown in the table below. Year-over-year changes in pension value generally are driven in large part due to changes in actuarial pension assumptions as well as increases in service, age and compensation. For 2014, the change in pension value for the named executives was substantially higher than 2013 primarily as a result of an 83-basis-point decrease in the statutory discount rate assumption from 4.85% to 4.02% as well as the Society of Actuaries’ recent issuance of new mortality tables projecting longer life expectancies. In particular, 52% of the increase in Mr. Immelt’s pension value in 2014 was due solely to changes in these assumptions. If the discount rate had increased to 6.56%, there would have been no increase in Mr. Immelt’s pension value. See “Pension Benefits” on page 42 for additional information, including the present value assumptions used in this calculation. Above-market earnings represent the difference between market interest rates calculated under SEC rules and the 6% to 14% interest contingently credited by the company on salary that the named executives deferred under various executive deferred salary programs in effect between 1987 and 2014. See “Nonqualified Deferred Compensation” on page 44 for additional information.
2. Additional column to highlight SEC Total Compensation minus the Change in Pension Value … Proxy Summary Compensation Table and Summary Compensation Table (pp. v and 21):
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