Citigroup had proposed to acquire, through a non-bank subsidiary, a British defined benefit pension plan with about $400 million in gross liabilities to the plan’s existing beneficiaries, the Fed said in a statement. The Fed did not identify the pension plan, but Citigroup recently acquired Thomson Regional Newspapers’ pension fund (see Citi Buys DB Plan of UK Newspaper Publisher ).
In announcing its decision, the Federal Reserve noted that the activity of acquiring, operating, and managing third-party pension plans has not been determined to be financial in nature or incidental to a financial activity for purposes of the BHC Act – and that, in fact, the proposed activity is “…broader than the pension plan activities that FHCs currently are permitted to conduct for third parties,” noting specifically that the nonbank subsidiary of Citigroup would assume the rights and obligations of the acquired pension plan, “…and would do so in transactions that do not represent the acquisition of a going concern or ongoing business operations by Citigroup.
Moreover, the assets and liabilities of the acquired pension plan (unlike assets held by an FHC as trustee for third parties or assets held by the pension plans maintained for Citigroup’s own employees) would be fully consolidated with the assets and liabilities of Citigroup on its balance sheet.
A Reasonable Basis
Nonetheless, the Federal Reserve Board concluded that there “…is a reasonable basis for determining that the acquisition, management, and operation by Citigroup of hard-frozen, fully funded third-party U.K. pension plans is an activity that is financial in nature within the meaning of the BHC Act.” The Board said that the activity involves, at its core, “the types of investment advisory and investment management skills that are routinely exercised by banking organizations and the types of operational and investment risks that banking organizations routinely incur and manage.”
It also noted that the proposed activity bears a strong functional resemblance to issuance of a group annuity contract, and that the BHC Act, as amended by the GLB Act, expressly states that providing and issuing annuities is an activity that is financial in nature.
Citigroup told the Federal Reserve that its proposal to acquire the pension plan was conditioned on a requirement that no additional beneficiaries may be added to the plan and existing beneficiaries may not accrue additional benefits under the plan (i.e., the plan would be operating under a "hard freeze"). In addition, Citigroup proposes that it would acquire the plan only if, at the time of acquisition it is fully funded by the selling sponsor based on the plan's assets and projected liabilities (using appropriate actuarial assumptions).
According to the Fed's announcement , Citigroup indicated that, as part of its due diligence process for each transaction, it would employ qualified actuaries to review and analyze the present value of benefits owed to plan beneficiaries to ensure that all pension plans acquired are fully funded by the selling sponsor.
In its statement, the Board considered that, under U.K. law, Citibank's nonbank subsidiary would generally bear sole responsibility for making additional contributions to the plan if the plan assets were not sufficient to meet the plan's expected or actual liabilities. However, U.K. law also permits the U.K. Pensions Regulator (which, it noted can, in certain circumstances, commence proceedings to hold an affiliate of a plan sponsor (including a depository institution affiliate) responsible for the sponsor's obligations to the plan.
However, the Board noted that Citigroup has obtained written assurances from the U.K. Pensions Regulator that it will not seek to hold any of Citigroup's depository institution subsidiaries responsible for any shortfalls that may occur in the pension plan proposed to be acquired in this initial transaction - and that, as a condition of this order, "…Citigroup must obtain similar written assurances from the U.K. Pensions Regulator before acquiring any additional third-party U.K. pension plan."
Last month Occupational Pensions Trust (OPT) set sail, noting that it had set out to capitalize on the trend of corporations unloading their pension schemes by offering partial buyouts and claims it is making the offering for a cheaper price than full buyout services (see UK Company Offering Partial Pension Buyout Service). By some measure, the trend of pension buyouts is gaining steam in the U.K. Anticipating large demand in the pension buyout market, U.K. companies announced last year they had raised substantial capital to acquire pension schemes (See UK Firm to Buy DB Plansand UK Company Garners £400M to Take On Final Salary Plans). Industry professionals at PLANSPONSOR's 2006 DB Summit predicted the emergence of a new entity that would take on administration and sponsorship of DB plans would also occur in the U.S. (See Is Sponsorship Transfer Next Frozen DB Plan Solution? ).
On the other hand, a recent report by Aon Consulting cautioned that during the past six months there had been little sign of increased volumes of companies looking to offload their schemes, and deals that had been made were on average relatively small. Aon said during the second quarter of the year 75 schemes were bought out, compared with an average of 84 per quarter during 2006 (see Rush to Offload DB Plans Hasn't Happened ).