Retirement August 5, 2008, 9:36PM EST

Now Wall Street Wants Your Pension, Too

JPMorganChase, Citi, Cerberus, and Morgan Stanley are among the firms lobbying Washington to let them take over and run corporate pension funds

by Matthew Goldstein

http://images.businessweek.com/story/08/370/0807_mz_pension.jpg

Illustration by Richard Mia

Some of the folks that brought us the subprime meltdown and the global credit crisis have a bold new idea that could solve a slew of problems for U.S. companies—but also might cause a whole set of troubles for employees.

A broad coalition of Wall Street firms, from banks and insurers to hedge funds and private equity firms, are pushing lawmakers to let them buy and manage so-called frozen corporate pension plans, which no longer accept new members but must continue to cover current ones. Of the $2.3 trillion in U.S. corporate pension fund assets, some $500 billion sits in frozen plans, including those of big companies such as IBM, Hewlett-Packard, Verizon, and Alcoa.

At first blush the idea would seem to be a tough sell in Washington. Not only are Wall Street firms scrambling to boost profits and raise capital to stay afloat—they're also fighting allegations that they knowingly dumped toxic securities on unwitting investors during and after the mortgage boom.

Yet firms are getting a receptive ear from the Treasury Dept. After the IRS ruled that the concept needed legislative approval, Treasury on Aug. 6 offered a blueprint for lawmakers to allow "financially strong entities in well-regulated sectors" to acquire pension plans. Now the debate moves to Congress, which would have to change existing law.

For companies, offloading pension plans could be a boon. Many have struggled in recent years to make good on their generous pension promises, swinging from surpluses to deficits depending on the whims of the stock market. For example, Ford Motor, which reported an $8.7 billion loss in the latest quarter, has a pension plan that's underfunded by $9 billion, according to Credit Suisse analyst David Zion. Problems like that are a big reason why Charles Millard, director of the Pension Benefit Guaranty Corp., the federal insurer of last resort of corporate pension plans, is behind the Wall Street plan. He says it would "create greater security for retirees and the pension system," though he warns that "these deals should only be permitted when the acquiring entity has a higher credit-rating than the seller."

Dumping plans seems especially opportune for companies now. Since 2007, companies have been required to list pension-fund figures on their balance sheets, but that doesn't affect earnings. But new accounting standards that are supposed to take effect over the next two years will require them for the first time to include fluctuations in the value of pension assets or liabilities as part of their quarterly earnings totals, a change that could devastate profit results for some. "We have identified several clients who would be willing to be first to sell a plan," says Scott Macey, a senior vice-president with Aon Consulting, one of the firms lobbying hard for the new rules, alongside Citigroup, JPMorgan Chase, Morgan Stanley, Prudential Financial, Cerberus Capital Management, and others.

Wall Street, of course, has a different motivation—fees. As companies increasingly decide they can no longer offer the lavish benefits they once did and stop using pension plans as a recruiting tool, consulting firm McKinsey & Co. predicts that the assets in frozen plans will more than triple, to $1.7 trillion, by 2012. By taking over frozen plans, Wall Street firms could charge fees based on the total assets, perhaps in line with the standard 1% to 2% levied by many money managers.

"A TERRIBLE IDEA"

But the gambit to turn pensions into moneymakers raises plenty of questions. Critics, including some on Capitol Hill, worry that financial firms won't always have workers' best interests at heart, putting some 44 million current and future retirees at risk. "We think this is just a terrible idea," says Karen Friedman, policy director for the advocacy group Pension Rights Center. "In the wake of the subprime crisis, it would be crazy to allow financial institutions to manage these plans."

Historically, pension portfolios have been managed in a conservative fashion, investing mainly in stocks and bonds.

Reader Discussion

 

BW Mall - Sponsored Links