"The brothel is not yet open, but there is a line
of sailors around the block." That's one unnamed
observer's comment on the growing number of financial
entities—investment banks, private equity firms, insurance
companies, and hedge funds—that are looking to position
themselves for the next great opportunity in defined
benefit investment management: risk transfer.
However, a recent Treasury Department ruling underlines
that the grand prize will remain elusive a little
longer—Treasury has reiterated that current law prevents
financial firms from taking over frozen plans, but it also
left the door open for legislation to allow it.
In fact, Treasury's input likely will stoke the
fires, as it indicates that legislation may be in the
making. Certainly, some prominent pension players in
Washington are indicating an open mind. Asked if it
potentially could be a good idea to let financial companies
take over sponsorship of some frozen pension plans from
employers, Pension Benefit Guaranty Corp. (PBGC) Director
Charles Millard says, "You use the right word, which
is 'potentially.'"
It would work if set up to ensure that "pension
beneficiaries are more secure, and the pension-insurance
system is also more secure," Millard says. That means
making sure that only companies with a strong enough
balance sheet, a willingness to fully assume a plan's
liabilities, and a credit rating superior to the previous
sponsor could do buyouts.
"You want a large company that is very well-funded,"
Millard says. "You certainly want to improve the level of
security for employees and pension beneficiaries."
The concept has precedent in Europe. Citigroup agreed to
take over the frozen pension fund of Thomson Regional
Newspapers, becoming the first bank in Britain to buy out a
company's retirement plan. A clutch of specialist firms in
the U.K. is talking about similar deals, although
on-the-ground action remains a rarity.
In the U.S., the usual suspects are doing the
rounds—JPMorgan, Goldman Sachs, and Morgan Stanley—but
insurance companies, specifically Prudential and MetLife,
and more focused groups like Duff Capital also have made
their ambitions evident.
However, these ambitions first must clear two relatively
high hurdles: The first is a function of present law; the
second is that all of these "solutions" are expensive, even
if less expensive than the terminal annuities now
available.
Many who had been concerned about the possibility took
heart when, in August, the Treasury Department and the
Internal Revenue Service issued
Revenue Ruling
2008-45
, stating unequivocally that current law prohibits the
transfer of a tax-qualified pension plan from an employer
to an unrelated taxpayer unless it is connected with a
transfer of "significant business assets, operations, or
employees."
The agencies said that a deal like that violates federal
law that plans must be managed for the exclusive benefit of
participants, says Kathryn Ricard, Vice President,
Retirement Policy, at The ERISA Industry Committee in
Washington.
However, at the same time, the feds released a framework
of six principles to guide development of legislation that
would permit these transactions: plan participants, their
representatives, and ERISA regulators must get advance
notice of a transfer, and regulators must receive enough
information to review and approve a proposed deal; only
"financially strong entities in well-regulated sectors"
could acquire a plan; any deal must lessen risks to
participants' benefits and the pension-insurance system,
and be in the best interests of participants and
beneficiaries; limitations on transfers must be imposed "to
limit undue concentration of risk"; a new sponsor would
assume full responsibility for a transferred plan's
liabilities, as well as comply with reporting and fiduciary
requirements; and subsequent transfer transactions would be
subject to the same rules as original transfer
transactions.
"That was pretty unusual," Ricard says. "It is very
interesting that they did that: It shows some interest on
their end, but their hands are tied."
So far, no one in Congress has started leading the
effort to pass legislation. Representative Earl Pomeroy, a
North Dakota Democrat and influential voice on retirement
issues as a member of the House Ways and Means Committee,
has been quoted by The Washington Post as saying, "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. CEOs
could look at this as a very useful way to get the
uncertainties of pension funding and liability off their
books."