In particular, noted auditors with the U.S. Government Accountability Office (GAO), a pension buyout that makes economic sense may not be worth pursuing because of its potential impact on an employer’s relationship with its workforce.
“Whatever the ultimate effect buyouts would have on benefits security or plan sponsorship, it seems likely that they would change the traditional role that DB pensions play as a benefit employers provide directly to their employees,” the GAO auditors wrote. “One’s evaluation of buyouts may depend on the degree to which DB plans are defined by the employer-employee relationship, and not just on the monetary value of the benefits.”
In the report, Proposed Plan Buyouts by Financial Firms Pose Potential Risks and Benefits, the GAO noted the primary target market for buyouts are sponsors of slightly underfunded, frozen plans. On the upside, the auditors said a buyout could make participant benefits more secure and somewhat reduce the financial exposure of private pension insurer Pension Benefit Guaranty Corporation’s (PBGC).
Not only that, but plan buyouts could increase the security of DB pensions by allowing weak sponsors to transfer plans to firms with a healthier financial position and one capable of offering improved plan management. Sponsors would also have a broader choice in being able to shed their pension liabilities, presumably more cheaply than a standard termination through insurance companies, the GAO said.
On the downside, the GAO said:
- To the extent they are a successful model, buyouts could erode worker retirement benefits by encouraging plan freezes by sponsors wishing to avail themselves of this option.
- Buyouts would "sever the employment relationship between sponsors and participants, possibly eroding incentives to manage the plan in the interests of participants."
- Buyouts could increase the risk of a large claim against PBGC by increasing the concentration of assets and liabilities held by a single sponsor or sector.
- Buyouts could also lead to conflicts between agencies regulating financial companies and those regulating pensions. The Internal Revenue Service ruled in August 2008 that a DB plan that was bought out by a nonemploying entity would not qualify for tax preferences under current law.
"The troubling aspects of DB plan buyouts involve risks that may be difficult to foresee or quantify now or at the time of any particular transaction," wrote the auditors. "It is unclear to what extent buyouts would cost less than standard plan terminations simply because of differences in regulations facing financial institutions and insurance companies providing similar services to plan sponsors instead of from economic efficiency. Further, the current economic downturn has laid bare the current weaknesses and imperfections of financial regulation, with banks and insurance companies previously considered to be sound and well capitalized suffering catastrophic losses."
The report is available here .
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