On and Off The Hook

By Tomoeh Murakami Tse
Washington Post Staff Writer
Sunday, October 14, 2007

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.

Critics counter that buyouts are a dangerous idea that would further diminish pension benefits at a time when baby boomers are beginning to retire and longer life expectancies mean more years of pension checks. 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.), a member of the House Ways and Means Committee. "CEOs could look at this as a very useful way to get the uncertainties of pension funding and liability off their books."

Belt, who co-founded Palisades Capital with the private equity-hedge fund hybrid Reservoir Capital, said his company wants to "enable transactions where it's a win-win-win for the sponsor, participants and the federal pension insurance program."

The buyout proposals vary, but generally, they call for financial firms taking over pension plans that have been frozen by their original sponsors. This can be accomplished either directly or by setting up investment-management companies.

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 and the retirement plans become underfunded.

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 in the investment portfolio.

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, to sort out legal and regulatory questions. 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 in the form of written guidelines, rulings and advisory opinions.

"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."

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