AUSWR
The Association of U S West Retirees
 

 

 

Pensions may be outsourced
Banks look to take the plans and their assets off the hands of employers.
By Jonathan Peterson, Staff Writer
Los Angeles Times
Wednesday, October 31, 2007

WASHINGTON 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 stateside.

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 College.

Pension freezes typically mean that new employees can't participate in a plan or that current workers can't increase their benefits.

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 payouts.

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 compliance costs.

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 U.S. 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."

Seeking assurances

Belt, now chairman of advisory and investment firm Palisades Capital Advisors, is among those interested in taking over pension plans.

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 by them.

If federal regulators eventually allow such ownership shifts, Stein would like to see ironclad assurances that benefits would not be jeopardized.

U.S. 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," he said.

jonathan.peterson

http://www.latimes.com/business/la-fi-pension31oct31,1,4802787,print.story?coll=la-headlines-business