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Enron Executives Protected Pensions With Partnerships

Thursday, February 7, 2002 - 00:00
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Enron's bankruptcy may have wiped out most of the retirement savings of most of its workers. But one thing it didn't take away were the pensions of its most senior executives. Financial filings disclose that former Enron Chairman Kenneth Lay, for one, used a private partnership to protect millions of dollars worth of executive pension benefits.

To be sure, many Enron executives lost millions of dollars they had saved in deferred compensation plans, which are special savings plans that function much like outsize 401(k)s for executives, when the company filed for bankruptcy-court protection on Dec. 2. These executives will join other unsecured creditors in seeking to recover money from Enron.

However, executive agreements filed with the Securities and Exchange Commission over the years disclose that the most senior executives, who enjoyed more elite arrangements, were also able to shield their special pension packages from bankruptcy and protect them from creditors by sheltering them within private partnerships.

Filings show that Enron contributed millions of dollars to fund two life-insurance policies held by a private Texas partnership bearing the initials of Mr. Lay and his wife, Linda Phillips Lay. The KLL & LPL Family Partnership Ltd., which listed Mr. Lay as managing partner, owned the policies, one of which carries a face value of $12 million. The other, which has an undisclosed face value, is on the joint lives of Mr. Lay and his wife.

These kinds of arrangements aren't unusual. Indeed, at most large companies, top executives who participate in special retirement and pension plans are taking advantage of similar types of partnerships and trusts, which enable the executives to shelter large amounts of compensation from taxes, and pass it largely tax-free to heirs -- and indeed are proliferating. Last month, the deals got a big boost when the Internal Revenue Service, at the urging of the Bush administration, employer groups and the insurance industry, backed off a proposal introduced under the last administration to tax the insurance arrangements more heavily.

As part of an employment agreement Enron signed with Mr. Lay in 1996, the company agreed to pay a total of $1.25 million in premiums over five years on a $12 million life-insurance policy. Enron would receive the premium money back -- without interest -- only after Mr. Lay's death and the policy's execution. The partnership, and presumably Mr. Lay's heirs, would receive the rest. (The kinds of life insurance used in these arrangements is called "split-dollar," since the premiums are split between the company and the executive, who decides who receives the bulk of the money invested in the contracts, plus the earnings.)

As is common in these arrangements, Mr. Lay could withdraw funds from or borrow against the policy's cash value.

The company agreed to pay another $280,285 in annual premiums for nine years on a second split-dollar life-insurance policy for Mr. Lay and his wife, which he got in return for giving up other special executive retirement benefits.

Similarly, Jeffrey Skilling, who resigned as Enron CEO in August, had an $8 million split-dollar life-insurance policy held by the Jeffrey Keith Skilling Family Trust, whose trustee was Mark David Skilling, who isn't further identified.

Although Mr. Lay's and Mr. Skilling's agreements automatically terminated with Enron's bankruptcy or the executive's departure from the company, they included provisions that essentially allowed the executives to buy out Enron's interest in the policies within 60 days for the cost of premiums paid to that point. According to filings, the final $250,000 payment on Mr. Lay's $12 million policy was due in 2001; it isn't clear how many payments remain on the other policy.

It is unclear whether Mr. Skilling did buy Enron out. Mr. Skilling couldn't be reached, and Enron declined to comment. Regarding his own policy, Mr. Lay, through a spokeswoman, said he is "still evaluating his options, and no decisions have been made as of yet."

The assets in these policies are protected from creditors. The policies aren't assets of Enron, and the policies are secure from creditors who sue the executives personally. "It looks like they're home free," says Brian McTigue, a Washington lawyer who isn't involved in Enron litigation.

Enron's filings are silent about other arrangements it may have with Messrs. Lay, Skilling and others, and the value of those arrangements. Companies aren't required to disclose whether the trusts that shelter deferred compensation, for example, allow executives to cash out their money when a bankruptcy petition is filed. Moreover, Enron filed many compensation documents piecemeal, filing amendments as they were adopted, but often without a full restatement. The practice, while generally legal, makes reconstructing years-old benefit plans more difficult.