« Rural America | Main | Future Mortgage Resets »

Sunday, October 21, 2007

Pension Fund Buyouts

I've been sitting on this for several days trying to find time to think it through, but that hasn't happened, so let me toss it out to all of you. What do you think of this plan for financial firms to buy out frozen pension funds? Is this a positive development or something to worry about? I don't find myself particularly concerned, but like PBGC interim director Charles Millard, I believe the "regulatory issues and hidden risks are very complex," and that makes me wary of taking a position on the proposal before having a more complete understanding of the consequences:

On and Off The Hook, by Tomoeh Murakami Tse, Washington Post: Some financial services firms are trying to clear a regulatory path that would let them buy out pension plans, freeing employers from pension obligations while potentially giving profit-driven financiers direct control over the retirement savings of millions of Americans.

The interested players range from venerable Wall Street banks such as J.P. Morgan Chase and Citigroup to start-ups, including one co-founded five months ago by Bradley D. Belt, the former executive director of the federal Pension Benefit Guaranty Corp. These groups say the buyouts would not only benefit companies that want to get off the hook of pension responsibilities, but also help workers by putting their retirement assets in the hands of shrewd money managers. And if those assets are profitably invested, the groups say, it would reduce pressure on the PBGC, which insures the pensions of nearly 44 million Americans but has a deficit of $18 billion. ...

Opposition groups mistrust the motives of the financial firms seeking a piece of the $2.3 trillion in assets in corporate pension plans around the country.

"My initial take on all of this is: This has a lot more to do with taking care of CEOs than taking care of workers," said Rep. Earl Pomeroy (D-N.D.)... "CEOs could look at this as a very useful way to get the uncertainties of pension funding and liability off their books." ...

The buyout proposals vary, but generally, they call for financial firms taking over pension plans that have been frozen by their original sponsors. ...

In "frozen" pension plans, employers no longer pay into the fund and workers do not accrue new benefits, though employers continue to carry the assets and liabilities on their books. That means the companies would be on the hook for additional funds if, for example, the stock market plunges...

Most employers seeking to end pension plans or get rid of frozen plans issue a lump-sum payment to employees and retirees, or they buy annuities from insurance companies, which take over management of the assets. The assets then fall under state insurance regulations, which require that the companies maintain certain reserves to balance risks...

The buyout proposals suggest a different scenario: Financial firms would take control of the assets and liabilities of a pension plan, and continue to operate it under the Employee Retirement Income Security Act of 1974. ERISA, which governs company-run pension plans and establishes minimum standards, requires that the assets be invested with "care, skill, prudence and diligence." The PBGC is the final backstop for failed pensions.

The financial services firms are in discussions with the federal agencies that interpret and enforce pension laws, including the PBGC, the Labor Department and the Internal Revenue Service... The firms are seeking a ruling on whether a buyout firm would be a legitimate sponsor of a pension plan and, if so, whether it could continue to receive tax breaks on contributions to the pension plan.

Advocates say there is nothing in the law that prevents financial firms from buying out and maintaining pension plans, as long as the transactions are properly structured to protect employees and retirees. Before proceeding, however, some firms would like to receive assurances from the regulatory agencies...

"These are very interesting proposals," said Charles E.F. Millard, interim director at the PBGC. "They make claims concerning improvement in the health of the pension-insurance system that might make them attractive. However, regulatory issues and hidden risks are very complex. And so these proposals need significant study." ...

Depending on which financial firms take over the pension plans and how they do it, some analysts said, it is far from certain whether it would alleviate the burden on the PBGC. ... Some critics fear that a financial entity might buy out a pension fund and gamble with its assets, knowing that if the investments made money, the firm would reap the excess profits, and if it lost money, the PBGC, which is funded by insurance premiums paid by pension funds, would be the backup.

"This is like the latest wonderful product from the people who brought you the subprime disaster," said Damon A. Silvers, associate general counsel of the AFL-CIO. "When you have a situation in which a risk is being laid off, and none of the participants in the transaction have that much of an interest in seeing that the benefits are being paid . . . the likelihood that there are going to be inadequate assets is pretty high." ...

Some analysts are predicting that a series of changes to accounting rules would increase the cost and risk of maintaining such plans, possibly pushing employers to find a way out of them.

The consulting firm McKinsey & Co., in an internal report earlier this year, said that 50 to 75 percent of traditional pension plans in the private sector would be terminated or frozen over the next five years.

"The two-and-a-quarter-trillion-dollar question, though, is, once they freeze it, what do they do next?" said David Oaten, head of J.P. Morgan Chase's U.S. pension advisory group. ...

    Posted by on Sunday, October 21, 2007 at 02:34 PM in Economics | Permalink  TrackBack (0)  Comments (39)

    TrackBack

    TrackBack URL for this entry:
    https://www.typepad.com/services/trackback/6a00d83451b33869e200e54efbb9b18833

    Listed below are links to weblogs that reference Pension Fund Buyouts:


    Comments

    Feed You can follow this conversation by subscribing to the comment feed for this post.