Full disclosure: A practical guide for the HR professional when preparing the retirement plan portions of a proxy statement

Reprinted with permission from Employee Benefit Review - May 2014

In 2006, the SEC adopted rules which created the Pension Benefits Table and Nonqualified Deferred Compensation Table to supplement the Summary Compensation Table. The tables mandate certain specific disclosures with respect to the Named Executive Officers (NEOs) and their retirement plans. This is one area of the proxy preparation process where the company must work closely with its actuarial consultant, and often with its legal counsel as well. The following is a summary of the relevant sections of the proxy statement with respect to retirement benefits, as well as some practical advice for making sure the process goes as smoothly as possible.

Compensation discussion & analysis (CD&A)

• Companies must provide a description of the retirement plans in plain English, in the CD&A section of the proxy statement. Typically companies will explain how their retirement plans fit into their overall compensation philosophy and align with their strategy and objectives, including how their executive retirement programs are used to attract and retain talent. Many companies also include an analysis of their executives’ wealth accumulation, or the “walk-away” amount, which would include an analysis of the retirement plan components.

Summary compensation table (SCT)

• For defined contribution plans (both qualified and nonqualified), companies must disclose the annual contributions/allocations for each NEO during the three most recent fiscal years, in the “All Other Compensation” column.
• For defined benefit plans (both qualified and nonqualified), companies must disclose any increase in the value of accrued pension for each NEO during the three most recent fiscal years in the “Change in Pension Value and Nonqualified Deferred Compensation Earnings” column. This is simply the difference between the present value of the benefits at the end of the current year (as shown on the Pension Benefits Table) minus the present value of the benefits from the end of the previous year (as shown, or what would have been shown, on last year’s Pension Benefits Table). The increase reflects changes in plan provisions, additional benefits accrued during the year, increase in value due to the passage of time, and the change in present value of the benefits due to changed assumptions (including discount rates). Relevant key valuation assumptions must be disclosed in footnotes. (See below under Pension Benefits Table for details about what assumptions to use.) Some companies provide additional comments in footnotes when there is a significant impact due to a change in assumptions. If the amount is negative, it should be disclosed by footnote but should not be reflected in the sum reported.
• If any defined contribution Nonqualified Deferred Compensation (NQDC) plan provided an above-market rate of interest, such value must be disclosed in the “Change in Pension Value and Nonqualified Deferred Compensation Earnings” column. Only the above-market portion of the interest must be included. If the applicable interest rates vary depending on conditions such as a minimum period of service, the reported amount should be calculated assuming all conditions for receiving interest at the highest rate were satisfied. Dividends (and dividend equivalents) on deferred compensation paid in stock are preferential only if earned at a rate higher than dividends on common stock.

Pension benefits table

• For each defined benefit plan (qualified and nonqualified), companies must disclose the credited number of years of service, the actuarial present value of the accumulated benefit, and payments made during the company’s last completed fiscal year for each NEO. These items must be shown separately for each plan. In addition, it is necessary to show any benefit payments during the past year. If an NEO’s years of credited service are different from the actual years of service, there should be a footnote disclosure explaining the difference.
• For purposes of disclosing the amount of present value of accumulated plan benefits, the present value is determined as of Earliest Unreduced Retirement Age. Generally, this would be the Normal Retirement Date, unless there is also a younger age at which benefits may be received without any reduction. Also, there should be no pre-retirement mortality reflected.
• The assumptions used to determine the present value of accumulated plan benefits (other than the assumed retirement age and pre-retirement mortality discussed above) should be consistent with those used in determining the value of benefits under ASC 715 for the company’s financial disclosure (you should consult with your actuarial and legal advisors if you choose to use tables that reflect a particular form of payment that is different from what was used for accounting purposes). Key assumptions, including the discount rates used, should accompany the Pension Benefits Table.  This disclosure may be satisfied by reference to a discussion of those assumptions in the company’s financial statements, footnotes to financial statements, or in the Management Discussion and Analysis.
• Companies must also provide a narrative summary of the material terms of the plans, including the purpose of the plan, eligibility criteria, benefit formula, normal retirement payouts, benefit forms available, the company’s policy with respect to crediting participants with extra years of service, and all terms applicable to early retirement (including whether any NEOs are currently eligible for early retirement), and the specific elements of compensation (e.g., salary, bonus, etc.) included in applying the payment and benefit formula.
• Even if the plan is frozen, the company is are still required to disclose the Present Value and all of the same information that would be required for an active plan. The company will also need to show the Change in Present Value on the Summary Compensation Table.
• If the Change in Present Value is negative (which is more likely to happen this year since discount rates have generally gone up), such negative amount should be disclosed by footnote but should NOT be included in the Change in Present Values column on the Summary Compensation Table.
• In the case where there are multiple plans and some are positive and some are negative, the company can either zero out only the negatives and add together just the positives, or it can aggregate them all together (positives and negatives) and only then apply the “no negative number” approach. The following contains an example from the SEC on this (Q&A 119.06): “In applying this instruction, a company may subtract negative values when aggregating the changes in the actuarial present values of the accumulated benefits under the plans, and apply the “no negative number” position of the instruction for the final number after aggregating all plans. Under this approach, if one plan had a $500 increase and another plan had a $200 decrease, then the net change in the actuarial present value of the accumulated pension benefits would be $300.”
• Two other situations where a company should consult with its outside advisors: (1) if the NEO’s benefit is subject to a QDRO and (2) if a benefit commencement date or form of benefit becomes known for an NEO (e.g., it is known that the NEO already did or will terminate at a specific date, and the company knows the benefit commencement date).

Nonqualified deferred compensation table

• For a nonqualified deferred compensation plan (NQDC plan, i.e. any defined contribution restoration plan or SERP), companies must disclose the plan contributions (both by employee and company), earnings, and distributions made during the company’s last completed fiscal year, and the account balance at the end of the fiscal year, for each NEO.
• Companies must also provide a narrative summary of the material terms of the NQDC plan, including eligibility criteria, the type of compensation that may be deferred, deferral limitations, measures for calculating interest/plan earnings and the material terms of any distributions.

Potential payments upon termination or change-in-control

• Companies must disclose potential retirement payments on a termination or change-in-control event. This requirement does not apply to retirement plans that are available generally to all salaried employees. The potential payments must be calculated as if the termination or change-in-control event occurred on the last day of the fiscal year covered by the proxy statement. Any acceleration of vesting or enhancement of the form or amount of retirement payments must be disclosed. There should also be a description of what impact various termination events, including a change in control, would have on the potential payout for each NEO.
• While the SEC has not prescribed any particular format for this, many companies choose to disclose this information in separate tables for each NEO, quantifying and itemizing the potential payouts for each termination type.

Directors

• The rules for the disclosures regarding members of the Board of Directors are generally the same with respect to reporting the “Change in Present Value” and “Nonqualified Deferred Compensation Earnings” and also any contributions to a defined contribution plan under “All Other Compensation”. While there is no requirement to include a Pension Benefits table, some companies do include a Nonqualified Deferred Compensation Table (or include comparable information in the discussion section).

If you have any questions about this topic, please contact Employee Benefits chair Lori Jones.