Subscribe to Dollars & Sense magazine. Recent articles related to the financial crisis. Now Wall Street Wants Your Pension, TooJPMorganChase, Citi, Cerberus, and Morgan Stanley are among the firms lobbying Washington to let them take over and run corporate pension funds.[Hat-tip to Ira Glazer on lbo-talk for alerting us to this article.] by Matthew Goldstein | BusinessWeek | August 8, 2008 The folks who brought you the mortgage mess and the ensuing hedge fund blowups, busted buyouts, and credit market gridlock have another bold idea: buying up and running troubled corporate pension plans. And despite the subprime fiasco, some regulators may soon embrace Wall Street's latest scheme. The Treasury Dept. on Aug. 6 offered a blueprint for lawmakers on Capitol Hill to allow "financially strong entities in well-regulated sectors" to acquire pension plans , after the IRS ruled that the concept needed legislative approval. "The Administration's proposal says these deals should only be permitted when the acquiring entity has a higher credit-rating than the seller," says Charles Millard, director of the Pension Benefit Guaranty Corp. (PBGC), the federal insurer of last resort of corporate pension plans. "Such a transaction creates greater security for retirees and the pension system." The issue will now, no doubt, move to Congress after the election. In preparation for that moment, the world's biggest big investment banks, insurers, hedge funds, and private equity shops have been quietly laying the groundwork for such deals over the past year. They would be a big prize for Wall Street. The $2.3 trillion pension honey pot has $500 billion in "frozen plans" that are closed to new employees and whose benefits are capped, including those at IBM IBM, Hewlett Packard (HPQ), Verizon (VZ), and Alcoa (AA). And that figure could triple by 2012, according to consulting firm McKinsey. By managing those troubled plans, Wall Street also gains entrée to an appealing set of customers to whom it can sell a broad array of fee-generating products. "We have identified several clients who would be willing to be first to sell a plan," says Scott Macey, a senior vice-president at Aon Consulting. "But the question is, when is a good time for this?" The concept of off-loading pension funds sounds great. For businesses it's a chance to rid themselves of struggling plans, which can weigh down a balance sheet. It's especially good timing now. New accounting rules take effect in the next year or so that will require companies to mark their pension assets to prevailing market prices each quarter—a change that could devastate some companies' profits. Meanwhile, many companies no longer want to pay for pensions, troubled or otherwise. A recent report from the U.S. Government Accountability Office found that most companies freeze their pension plans merely to avoid "the impact of annual contributions to their cash flows." But the gambit to turn pensions into for-profit enterprises raises troubling questions. Critics, including some on Capitol Hill, worry that financial firms don't have workers' best interest at heart, which would put some 44 million current and future retirees at risk. "We think it's just a terrible idea," says Karen Friedman, policy director for advocacy group Pensions Rights Center. "In the wake of the subprime crisis, it would be crazy to allow financial institutions to manage these plans." Read the rest of the article. Labels: pensions, subprime crisis, Wall Street Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). |
