Will Xerox Executives be U-SERP-ED?
After addressing the challenges the Xerox salaried employee pension will have after the Carl Ichan endorsed split (article found here), I was asked to research another Xerox pension, the Supplemental Executive Retirement Plan (or Xerox SERP). I found there’s precious little information available on these plans, but what I did discover raised serious concerns.
One case study that was relevant was the Daimler/Chrysler SERP as one potential outcome for Xerox executives. In the late 90’s Daimler’s business was struggling and through a merger and subsequent bankruptcy ended up discontinuing their SERP plan. Executives fought back to retain some of their benefits, but they ultimately walked away with nothing. More details of this situation are available here from a legal firm that wrote about this in 2013.
While Xerox is not on the brink of bankruptcy, they are losing money every year and taking drastic measures to stop the bleeding. The upcoming split is being pitched as a cost-cutting measure ($2.4 Billion over three years), but some believe it is positioning the company for a sale of one of the remaining pieces. If bought, would the new buyer honor the existing Xerox SERP? The buyer of Daimler put in writing that they would.
Areas of concern:
No protection
Unlike the salaried employee pension plan that’s protected by the Employee Retirement Income Security Act (ERISA), the SERP is only offered to executives who are assumed to be able to understand the terms. This means it’s up to the execs to fend for themselves if the company goes sideways and is unable to pay.
The salaried employee pension is also protected by the Pension Benefit Guarantee Corporation (PBGC) which continues payments to pensioners (with limits) that are no longer able to be supported by the offering corporation. The SERP has no guarantee like this.
The right to change
The Xerox SERP has a caveat that allows them to change the terms at any time. Does this caveat allow them to change for any reason, or do they need to be in or approaching bankruptcy to make this change?
Document or Services?
In a statement made by Xerox and reported by Moody’s, the objective of Xerox moving forward is to maintain an investment-grade credit rating. The SERP is a financial obligation and when corporations have too many of these, they lose their investment-grade rating. How far would the company be willing go to reduce these financial obligations if they continue to lose money?
Another question is on which side of the business will the SERP reside? The stronger Services side or the legacy Document side?
Is there a solution?
Knowing these concerns, one reasonable strategy seems to be to try to negotiate a lump sum settlement.
For example, SERP benefits paying $93,000 per year for life ( with nothing continuing to a beneficiary) for a 70 year old male would be worth a lump sum of approximately $920,000 according to multiple insurance companies.
If Xerox wanted to reduce liabilities they might consider offering a lump sum of less than that to reduce obligations for the future. A concerned executive might consider negotiating a portion of their benefits rather than nothing at all if Xerox’s business continues to suffer.
If this is something you’d like to pursue, we’d be happy to discuss your specific situation with you or put you in touch with the executives we know of that are also interested in this same option. Please visit our contact page to get in touch with us.
-Tim Porter, CFP®