Page 321 - Bruce Ellig - The Complete Guide to Executive Compensation (2007)

Chapter 6. Employee Benefits and Perquisites 307

By definition, the package has to be more attractive than in situation C simply because the
executive is more inclined to leave.
Normal Retirement. Normal retirement age for most plans is 65. It is the age at which
there is no reduction in the accrued defined benefit. Reductions called “discounts” are estab-
lished for defined-benefit plans when the benefit will be received for a longer period and the
plan has less time to fund the accrued benefit. In addition to “age only” normal retirements,
there are “service only” (e.g., 20 years). However, they are more typical in the public sector
than in the private sector. Some “age only” plans also establish an age and service combina-
tion rule that would qualify for a nondiscounted pension. For example, a “90 combination”
would mean any combination of age and years totaling 90 or more would qualify for a
nondiscounted pension. Examples would include age 60 with 30 years of service, age 59 with
31 years of service, or age 61 with 29 years of service. Some combination plans establish a
minimum age. For example, a plan with minimum age 60 would provide a nondiscounted
pension to anyone with a combination of 90 who was at least 60 years of age. Before 60 years
of age, the pension would be discounted.
Some companies establish an earlier normal retirement age for senior executives (e.g.,
age 60 or 62). This is the age at which they are expected to retire. If they were not eligible to
receive a nondiscounted, defined-benefit pension from the qualified plan, a nonqualified plan
would supplement benefits. These are identified as supplemental executive retirement plans
(SERPs) and will be discussed later in the chapter. Early normal retirement ages for execu-
tives enable experienced, less senior executives to be promoted somewhat earlier, filling
vacancies left by those departed.
Early Retirement. This is when an employee decides to retire before reaching “normal”
retirement eligibility. For every year less than normal retirement, the pension benefit is
reduced in three ways: (1) there is one less year of service, (2) one less year of earnings, and
(3) a greater discount of the annuity. Initially, these discounts were based on the actuarial fac-
tors of age and reduced time period for benefit accrual. However, over the years, many plans
have substituted less harmful discounts, in effect subsidizing early retirements. Table 6-25
examples of an actuarial discount and two supplemental discounts, one a constant and the
other weighted more favorably to late age.
Companies should note the difference between those seeking early retirement for
health, family, and other reasons versus someone seeking another job (whose pay will be
supplemented by the current employer’s early retirement pension). The retired job seeker
usually does best leaving a company with fully vested benefits in a final pay plan and join-
ing a company with a career earnings formula. However, if the individual has many years of
life ahead, he or she should probably not leave the first employer: the combination of the
heavily discounted pension from company A plus a small one from company B (due to
shortness of service) may be less than the full pension at 65 that would have been received
from company A. The graph in Figure 6-2 shows how the alternative choices can be
projected to a break even age (i.e., the life expectancy age beyond which it would have been
advantageous to not leave company A for another job). In this illustration, joining company
B at age 55 and drawing a discounted pension from company A for 20 years of service would
mean greater cumulative benefits until age 75 than staying with company A and receiving a
nondiscounted, 30-year pension.
Furthermore, when the early retirement annuity is more generous than an actuary deter-
mined mortality discount and/or the interest rate assumption is less than insurance companies