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Former CEO Jim Shaw, who retired at 53, is eligible to collect a pension of $5.95-million annually.

Jeff Bassett/The Globe and Mail

Shaw Communications Inc. has capped future payouts under its gold-plated executive pension plan and has closed the plan to future hires as it faces soaring pension costs in an era of low interest rates.

The company said it will cap future payments under the plan by setting 2012 as the base year for future retirees. That means executives whose salaries increase in coming years will have their pension based on their 2012 salary levels. The change will cut $25-million from the estimated $378-million liability for funding the executive pension plan.

Shaw will also close the plan – known as a supplemental employee retirement pension plan, or SERP – to future executives, which means it will cover only the 15 people who are currently in it, which will also help limit cost increases.

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"The decision to fund the SERP was made in line with good pension plan governance practices and was done from cash on hand," a company spokesman said in an e-mailed statement.

Concordia University accounting professor Michel Magnan, who specializes in executive compensation issues, said Shaw's pension costs have been soaring in an era of low interest rates, and the pension liability for chief executive officer Bradley Shaw would have risen dramatically in the past year if not for the design changes.

"In terms of the optics, it would have been almost beyond greedy," he said. "Probably somebody realized they needed to do something."

Interest rate impacts added $18.7-million to the liability for Mr. Shaw's pension in fiscal 2012, which ended Aug. 31, while the design changes cut $13.8-million from the liability. In total, the liability for his pension rose to $55.7-million in 2012 from $50.8-million, but the increase would have been far greater if the design change had not been implemented.

Shaw's executive pension plan has long been the most generous in Canada, and former CEO Jim Shaw, who retired in November, 2010, at age 53, is eligible to collect a pension of $5.95-million annually.

Bradley Shaw, 48, who replaced his brother as CEO, is eligible to receive a pension of $4.8-million annually if he retires at age 65.

He currently would have a pension of $3-million annually, but the company said he isn't yet eligible to retire and the $3-million calculation is a notional value.

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The company's proxy circular shows Mr. Shaw earned a salary and bonus of $6.9-million in 2012 and received no share-based awards, but recorded a negative total pay total for the year after the company included the $13.8-million saving from amending his pension plan. In 2011, he earned salary, bonus and share awards totalling $7.9-million.

His father, executive chairman JR Shaw, earned a salary and bonus of $8.5-million in 2011, down from $10.3-million in 2011.

The company also disclosed in its most recent shareholder proxy circular that it will take the unusual step of financing its SERP, which means it will set aside money to cover future pension costs. In fiscal 2012, Shaw said it put $300-million into the plan after the end of the fiscal year to partly cover the estimated $378-million liability.

SERPs are not standard registered pension plans, and companies normally pay the benefits out of their annual cash flow. Prof. Magnan said it is not typical for companies to finance their SERP, and there have been cases in Canada where executives have lost their SERP pensions when companies went out of business. Financing the plan by putting the money into trust provides certainty that the benefit will not be lost or changed in the future, he said.

The downside, he said, is that Shaw has set aside a large sum that it could have instead used to build its business. "This $300-million now will not be invested in the business," Prof. Magnan said. "From a straight value-creation perspective, it would have been better for Shaw to keep the money because they are able to get a much better rate of return by investing in the communications operations than by investing in their pension plan."

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