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VOL. 123 | NO. 155 | Friday, August 8, 2008

Treasury Rules Against Pension Plan Transfers


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WASHINGTON (AP) - The Bush administration dealt a blow to the already reeling financial services sector Wednesday, ruling that companies can't transfer their pension plans to large banks to be managed for a profit.

The Treasury Department and the Internal Revenue Service said that current law doesn't allow such transfers unless they are part of a larger transaction that also includes "significant business assets."

Despite the ruling, the Treasury Department indicated the Bush Administration would support legislative changes to allow the transfers to occur.

The notion of allowing banks and other companies to acquire pension plans and manage them for a profit has raised some concerns among Democrats in Congress and unions.

Rep. Earl Pomeroy, D-N.D., said the Democratic-controlled Congress is unlikely to approve legislation allowing such transfers. Pomeroy has requested a report on the issue from the Government Accountability Office, the investigative arm of Congress.

Given the "chaos in the lending world" that's resulted from the "slicing and dicing of mortgages," Pomeroy said, "I don't think it would be a good idea to have pension obligations similarly passed around."

The head of the Pension Benefit Guaranty Corp., which is charged with backing the retirement benefits of 44 million Americans, disagrees.

"For technical reasons, these transactions are not currently permitted under law, but as a policy matter they should be," said PBGC Director Charles Millard.

Millard and other proponents of the deals say they could benefit retirees by allowing a company with a weak balance sheet to transfer its pension plan to a bank or other financial institution with more resources. Banks also could do a better job investing the plan's assets, they say.

Financial institutions, meanwhile, would benefit by receiving a payment from the companies in exchange for assuming the risks associated with pensions. More funding could be needed in future years, for example, if beneficiaries live longer than expected.

Such transfers also could make it less likely the PBGC would have to bail out ailing plans. Last year, the agency reported a $14.1 billion deficit.

But opponents warn the banks would seek to profit from taking over the plans, a goal that could conflict with the pension plan's primary purpose of paying benefits to current and future retirees.

Dan Pedrotty, director of the AFL-CIO's office of investment, said in an interview last week that it's a question of whether acquiring banks would see the plans "as retirement vehicles or as cash cows?" But the labor federation isn't wholly opposed to such transfers, since they could benefit employees at ailing companies that would otherwise go out of business.

Pedrotty said Wednesday the AFL-CIO supports Treasury's "measured, deliberative approach."

Pensions currently are transferred as part of mergers and acquisitions, but the IRS said the transfers at issue aren't allowed because pensions have to be managed for the "exclusive benefit" of employees. Plan beneficiaries wouldn't be employees or ex-employees of the banks.

The Treasury Department sought to address concerns with a set of principles it said should be included in legislation allowing the transfers.

The principles include: requiring advance notice of a transfer to regulators and participants in the plan; limiting transfers to "only financially strong entities in well-regulated sectors" and requiring acquiring companies to demonstrate that beneficiaries would be at less risk after the transaction.

Several large banks, including JPMorgan Chase & Co. and Citigroup Inc., had urged Treasury to allow the transfers, according to Don Fuerst, a partner at the Mercer consulting firm in Denver. Spokesmen for those two banks did not immediately return calls for comment.

"The players in this think the market is potentially very big," Fuerst said. Companies hold as much as $2 trillion in pension plans, according to some estimates.

Smaller investment firms also are seeking to manage the plans. Brad Belt, a former PBGC director, set up Palisades Capital Advisers LLC last year in part to acquire pension plans.

Most experts expect the transfers, if allowed, would involve "frozen" pension plans, which are closed to new participants and don't allow current participants to accrue additional benefits. Only traditional pension plans would be transferred, rather than 401(k)-style defined contribution plans.

A recent GAO report estimated that 3.3 million Americans participate in frozen retirement plans, about one-fifth of all those with traditional pensions.

Pomeroy and Pedrotty contend that allowing the transfers could encourage more companies to freeze their pensions.

Copyright 2008 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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