Home > Uncategorized > Wal-Mart Shareholders Deny Prime Pension Plans’ Push for Change

Wal-Mart Shareholders Deny Prime Pension Plans’ Push for Change

By Chris Butera

Despite their efforts to grant Wal-Mart shareholders proxy access and an independent board chairman, six titanic pension funds were unable to sway the vote in favor of certain proposals at the retail giant’s annual meeting last Friday.

The pension funds included the $322.3 billion California Public Employees’ Retirement System; $206.5 billion California State Teachers’ Retirement System; $189.4 billion Florida State Board of Administration; C$316.7 billion ($235.4 billion US) Canada Pension Plan Investment Board; $133.2 billion Texas Teacher Retirement System; and the C$175.6 billion ($130.4 billion US) Ontario Teachers’ Pension Plan. While five of the funds supported both proposals, the Ontario Teachers’ Pension Plan supported only the proxy-access proposal.

“We consider it (proxy access) a shareowner right. It’s increasingly being adopted by quite a significant section of the S&P 500. Small companies usually lag behind that adoption, but for companies the size of Wal-Mart, it’s significantly taken adoption. Independent chair is another fundamental governance concept that we typically endorse,” said Jacob Williams, Corporate Governance Manager, FSBA. “When you have the strong chairman and the strong CEO, you have greater perspective for the company to have two separate individuals in situations where they can work with each other proactively, strengthening the equality and perspective of the board.”

The six plans also were against the compensation ratification of C. Douglas McMillon, Wal-Mart’s CEO and president, as well as four other named executives. McMillon’s total 2016 compensation was $22.4 million, a 13.13% increase from 2015’s $19.8 million.

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“We feel pay relative to performance is a key fundamental tenant for us. We had some concerns about the stringency of the compensation awards,” said Williams. “Really, for us it’s important that performance is aligned with the incentives of shareowners, not just management but also the shareowners returns. If the compensation metrics and the goals and the target levels are not stringent enough to motivate performance at the level to reward shareholders, that’s always a concern to us.”

Although the entities pushed for the proxy access, which would allow shareholders to nominate their directors, and independent chairman proposals, only 15% and 26% of shareholders, respectively, took their suggestions to heart. Eighty-three percent of shareholders voted in favor of the executive compensation proposal. According to a May report, proxy-advisory firm Institutional Shareholder Services also sided with the pension plans’ suggestions.

“If the board listens to shareowners over time, we may see some additional adoptions. It’s relative to the stock performance and the shareowners view of the board, which can change over time,” Williams said. “We weren’t sorely disappointed but we’ll keep an eye out for next time.”

Home > Uncategorized > Verizon Borrows $3.4 Billion to Make Discretionary Pension Contribution

Verizon Borrows $3.4 Billion to Make Discretionary Pension Contribution

Tax considerations, rising PBGC premiums drive move, Russell Investments says.

The decision by Verizon Communications to borrow $3.4 billion to make a discretionary pension contribution was driven by tax considerations and concern over rising Pension Benefit Guaranty Corporation (PBGC)  premiums, according to Bob Collie of Russell Investments.

According to Verizon CFO Matt Ellis, the $3.4 billion discretionary pension contribution the company is making has a “net present value positive (NPV),” but the math behind that statement is driven by tax considerations and a sharp increase in PBGC premiums.

In a 2015 paper, Russell consultant Jim Gannon noted that when PBGC premiums were increased, it created a situation where “the variable rate component of these premiums is now a very significant cost for sponsors with underfunded pension plans.

“However, the same legislation makes it easier for an underfunded plan to be maintained, by giving greater flexibility to sponsors in determining their contribution schedules (i.e., reducing the required minimum contributions),” Gannon wrote.

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While pension funds have traditionally borrowed money to fund their plans, they essentially substituted one form of debt with another (borrowing to either fund the plan or else to repay a borrower). But the Verizon action was made different, according to Collie.

In an April 2017 note, Collie wrote that Verizon’s Ellis said in a quarterly conference call that “the discretionary pension contributions are net present value positive on an asset tax basis given the reduction in our variable rate PBGC premiums and the expected net return on planned assets.”

This “borrow to fund” strategy is driven by tax considerations, Collie said, since the “tax affects the NPV calculation because pension contributions are tax deductible, whereas only the interest on corporate debt is tax deductible (while principal repayments are not.) Tax effects therefore generally have tended to favor a borrow-to-fund strategy.” Collie also noted that the increase in PBGC variable rate premium is equivalent to a tax on pension shortfalls, so this is another factor that tends to favor borrow-to-fund.

In a related matter, earlier this month, Richard McEvoy, a Mercer partner, said pension funds are at a “tipping point” in deciding to make contributions or close their pension funds altogether. In a paper, “DB Pensions and the Emergence of the Big Bang Theory,” McEvoy said pension plans are making contributions because a plan has to be fully funded before it is closed in accordance with PBGC standards. Among the reasons more plans are making larger contributions is due to the four-fold increase in the pre-participant and variable-rate (“deficit tax”) participant PBGC premiums. Another feature driving the push towards making pension contributions is that funds receive a corporate tax deduction due to pre-funding.