Pensions may be outsourced
Banks look to take the plans and their assets off the hands of
By Jonathan Peterson, Staff Writer
Wednesday, October 31, 2007
Would you feel comfortable if your company sold off your pension
plan to a big bank?
This month, Citigroup Inc. got the green light from the Federal
Reserve for an unusual deal to take over the $400-million
retirement plan of a British newspaper company.
In exchange for getting its hands on all that cash, Citigroup
will run the pension plan -- investing the money, paying the
benefits and taking on the liability previously borne by Thomson
Regional Newspapers. And it's eyeing similar moves
Other banking investment and financial companies, including
JPMorgan Chase & Co., also are exploring the idea of taking
pension plans -- and their billions of dollars of assets -- off
the hands of employers. At least three federal agencies
are considering aspects of the idea, including its basic
legality and safeguards for workers.
Advocates say such changes would be a win-win for retirees and
employers, retaining all the protections of current law, while
putting plans in the hands of sophisticated financial stewards.
Plus, large banks are less likely to go out of business or face
severe financial strains than smaller employers.
Yet other people worry that such setups could subject retirement
benefits to new risks and jeopardize decades-old worker
protections. They're concerned that the would-be pension
managers are more interested in profit than in the security of
retirees. Further, they fear that unwise investments could
bring a crisis for which there is no simple solution.
"This is easy money," said Karen Friedman, policy director of
the Pension Rights Center,
an advocacy group that speaks out on pension policies and
retirement security issues from the standpoint of workers and
retirees. "You'd have these third-party institutions that
would have really no ties to the workforce. . . . We have a lot
of concerns. There are some big questions."
Targeting 'frozen' plans
The main targets for pension takeovers are the growing number of
plans that have been limited or "frozen" by employers, as the
Thomson plan was. From 2002 to 2006 alone, some 3 million
workers may have had their plans limited or frozen, according to
the Center for Retirement Research at Boston
Pension freezes typically mean that new employees can't
participate in a plan or that current workers can't increase
Pensions are protected by the Employee Retirement Income
Security Act of 1974 and amendments to that law, which set
standards for funding a company's long-term promises. The
law also places responsibility on those who run plans to act
entirely in the interest of workers and retirees.
Investments are supposed to be diverse and chosen wisely.
These traditional pensions still cover about 44 million workers
and retirees, and represent a cash pot of $2.3 trillion.
But a growing number of employers have been backing away from
such plans, which have guaranteed benefits; instead, many are
offering 401(k) plans and other programs without fixed benefit
Two-thirds of companies that offer traditional pensions either
have limited the benefits or plan to do so in the next two
years, according to a July survey by the Employee Benefit
Research Institute and Mercer Human Resource Consulting.
Even when pensions are frozen, however, employers face costs and
uncertainties about their pension investments and how long
people will live to collect benefits.
In addition, new accounting rules require companies to make
clear their pension liabilities on their balance sheets -- which
adds another source of volatility to financial statements.
And some firms are worried about a 2006 law that may push up
Looking for alternatives
Ari Jacobs, head of the Retirement Benefits Advisory Group at
Citigroup in New York, said American
employers seemed "very interested in opportunities to reduce or
eliminate the risks associated with their pension plans."
He added: "We in the
are looking at a similar model" as the British deal.
"A lot of these companies -- including some that are our clients
-- are asking, 'What are our alternatives now that we've frozen
the pension plan?' " said Scott Macey, senior vice president and
director of government affairs for Aon Consulting.
Until now, the alternatives have been to pay off workers with
cash or to buy annuities from insurance companies, which then
continue to pay the benefits.
But now, financial companies such as Citigroup say they could do
the job more cheaply than insurance companies -- and with
greater expertise at managing risk. Insurance companies,
for example, face costly state-by-state regulation that pushes
up the price of annuities.
"As a financial institution, we believe we're better at managing
financial risk than anybody else," Citigroup's Jacobs said.
"That's our core business."
Carl Hess, head of Watson Wyatt Worldwide's investment
consulting practice, said: "The banks are saying, 'We can
undercut the insurance companies.' That's what they see as
their entree here."
Chicago-based Aon is in talks with "several large financial
institutions" to explore ways that those firms could assume
control of pension plans, Macey said. As envisioned, all
legal protections for workers and retirees under the 1974
retirement income law would remain in effect.
"Everything that a current plan sponsor would be required to do,
the new sponsor would be required to do," he said.
Jacobs echoed that, saying: "This is not about changing
anybody's benefits whatsoever."
Asked why a financial firm would be interested in taking on
pension obligations, Bradley D. Belt, former executive director
of the federal Pension Benefit Guaranty Corp., which insures
private pension benefits up to certain limits, put it this way:
"If somebody gave you $95 today and said, 'you get to pay me
$100 a year from now,' would you take the money? I suspect
that most people who are in the asset management and investment
management business would say absolutely yes."
Belt, now chairman of advisory and investment firm Palisades
Capital Advisors, is among those interested in taking over
He is talking with large partners about pursuing such business
if it becomes legal.
Retirees whose plans were transferred "would still have the full
panoply" of government protections, Belt said.
But Norman Stein, a pension authority and professor at the
University of Alabama School of Law, worries that if shifting
ownership becomes an easy option, it might encourage some
employers to freeze and unload pension plans instead of sticking
If federal regulators eventually allow such ownership shifts,
Stein would like to see ironclad assurances that benefits would
not be jeopardized.
regulators are starting to weigh in. The Department of
Labor is examining whether such proposals are legal under the
Employee Retirement Income Security Act, and the Internal
Revenue Service is reviewing such matters as whether new pension
sponsors would be able to deduct any pension contributions they
make, as employers are allowed to do.
The Pension Benefit Guaranty Corp. is also looking into the
matter. The federal pension insurer's deficit -- already
$18 billion -- will grow if major plans go belly up in the
future and it is forced to take on new obligations. At the
same time, better management of shaky pension funds could save
the insurer from new costs.
"These proposals present the possibility of significantly
greater security for pension beneficiaries and the PBGC," said
Charles E.F. Millard, its interim director. "This could be
very attractive, but there are numerous regulatory issues and
potential risks that need to be explored."
Managing the risks
Among the risks to be considered: What would happen if a
financial company took control of many pensions, perhaps
bundling them together -- and the investments failed? The
federal pension insurer could then be faced with an overwhelming
cost, Watson Wyatt's Hess said.
If an outside company took over just a few pension plans, the
risks might be manageable, he said. "It works twice," he
said. "It doesn't work 200 times."
Aaron Albright, spokesman for the House Committee on Education
and Labor, said the panel was examining what implications such
pension takeovers would have for workers.
"We also want to make sure that these buyouts do not create new
incentives for companies to drop their defined benefit plans,"