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A gentler pension change at AT&T …

Talk to longtime AT&T workers, and plenty will characterize the company as anything but gentle when it comes to fiddling with its pension plan. Changes in the late 1990s promised to leave tens of thousands of older employees working for years — a decade or more in some cases — without seeing their pensions grow. The company has resolutely fought a class-action age-discrimination lawsuit over the maneuver since then, and on June 7 won dismissal without a trial from a federal judge in New Jersey. (The plaintiffs are likely to appeal.)

In the meantime, however, AT&T is freezing the pension benefit of Chief Executive Randall Stephenson, and its approach is a little different. For one thing, the company is freezing Stephenson’s benefit in stages, in a way that helps maximize the benefit he’ll receive.

The amended plan was disclosed in an 8-K filing on Friday that started out describing minor changes to the telecom giant’s executive severance plan. (AT&T ended its practice of reimbursing executives for taxes on their deferred compensation payouts in a change-of-control.)

Traditional pension plans, of course, usually combine age, years of service and pay toward the end of a worker’s career; many, whether for executives or rank-and-file workers, allow participants to retire early and still collect a reduced benefit.

In the case of the special pension Stephenson benefits from — called a SERP, for supplemental executive retirement plan — the formula is particularly generous: Among other features, it bases the pension value on the highest 36 months of the 10 years preceding his retirement, counting both bonus and salary.

This week’s amendment freezes his pay for pension purposes as of today. But Stephenson was 49 years old in March, when AT&T filed its proxy, and has just 28 years of service with the company. As a result, an AT&T spokesman told us by email:

“The current age discount would be significant — more than 50 percent — and the Committee took Mr. Stephenson’s long service to the company into account in determining what benefit to provide.”

They took it into account by not freezing the years-of-employment portion of his pension formula until Dec. 31, 2012 — when he will have 30 years of service, eliminating any age discount.

At the same time, by freezing the pay portion of the formula this summer, Stephenson’s pension will be based on his pay from July 2007 through June 2010 — roughly his tenure as CEO so far. This, the AT&T spokesman points out, means the formula will include 2008, when Stephenson didn’t collect a bonus at all.

Still, the final average pay used to calculate his benefit won’t be skimpy: It works out to about $4.6 million through Dec. 31, 2009 — less than $500,000 below his 2007 salary and bonus. Put another way, when it comes to his pension, his 2009 bonus of $5.85 million almost makes up for the lack of a bonus in 2008.

The bottom line is almost impossible to determine. In the latest proxy, the value of Stephenson’s SERP was pegged at $28.6 million, assuming he made it to his 30th anniversary. His pay for the first six months of 2010 will ultimately be factored in, but that figure isn’t yet knowable for investors.

Moreover, at least one clause in the amended plan gives a committee of AT&T’s board broad discretion to adjust Stephenson’s benefit — potentially raising it substantially. Most pension plans establish in advance how a lifetime benefit can be converted into a lump-sum payment at retirement. However, as the plan now says:

“The lump sum equivalent of Mr. Randall Stephenson’s frozen Target Retirement Benefit under the Plan shall be determined as of December 31, 2012 (except in the event of his earlier Termination of Employment) using factors and methodology to be determined by the Human Resources Committee.”

Translation: The board’s committee will figure out what Stephenson’s pension payout is really worth in two years.

All this attention by AT&T to Stephenson’s pension, plus that date some two years down the road when Stephenson will reach a milestone in his time at AT&T — well, it raised a natural question for us: Is this laying the groundwork for his retirement? The company spokesman says no. In his words:

“These changes have absolutely no relationship to when Mr. Stephenson might retire.”

Whenever Stephenson does retire, of course, it’s pretty clear his pension will prove more than adequate for him to live quite comfortably indeed. No doubt AT&T’s investors, and employees, are reassured.

Image source: Art By Steve Johnson via Flickr

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