Now Wall Street Wants Your Pension, Too

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Alternative investments such as hedge funds, derivatives, and asset-backed securities typically represent less than 25% of pension assets. If financial firms get in, the fees they collect would present a financial incentive to boost assets under management. One way to do that would be to move pension plans into riskier investments. Even worse, critics say, Wall Street firms could use pension portfolios as a dumping ground for ailing investments on their own books. They point to the auction-rate securities market, where, regulators allege, some Wall Street firms pushed stockpiles of failing investments onto unsuspecting clients.

If Wall Street gambles with those pension assets and loses, U.S. taxpayers could be stuck with the tab. When a company with a pension goes under, the PBGC, under federal law, has to pay out the fund's obligations up to a certain amount. It's a costly burden: The PBGC currently runs a $14.1 billion deficit.

Former PBGC Director Bradley D. Belt argues that pension buyouts could strengthen the agency. If financially strapped companies were to jettison their plans, the businesses might avoid bankruptcy, and the PBGC wouldn't have to step in and pick up the pieces. "While there are legitimate regulatory and policy considerations, much of the criticism is misplaced," says Belt, who two years ago teamed up with private equity firm Reservoir Capital Group to form Palisades Capital Advisors, a pension advisory firm.

With Treasury approving the general concept of pension buyouts, lawmakers are gearing up for a legislative battle. Earlier this year, the Government Accountability Office, at the behest of skeptics in Congress, began studying the issue, and it plans to publish a report later this year. The big firms pursuing the idea will likely ramp up their lobbying efforts. JPMorgan has been particularly active, sending a letter in September 2007 to several federal agencies with its own "guidelines for pension transfers." JPMorgan's newest property, Bear Stearns, was among the first to lobby Congress and regulators. It started last year, just as two of its hedge funds were imploding.

Not all firms are on equal footing in the race for pension assets. Under federal pension laws, an employer can deduct from its taxes part of its pension plan contributions. But the IRS recently declared that the tax break doesn't apply to banks, private equity shops, or other financial firms that buy plans merely as a business opportunity. Congress would have to remove the restriction to open the door for those players at all.

Small, independent outfits that aren't tied to the books of a bigger financial entity could be out of luck entirely. The worry is that such stand-alone entities wouldn't have the balance-sheet heft to take on big chunks of pension assets. Belt, a former top aide to presumptive Republican Presidential nominee Senator John McCain (R-Ariz.), has been the most vocal proponent of letting smaller independent firms like his buy pension plans. Although he says it's too soon to tell whether that option is off the table, his proposal has stirred controversy. In its letter to regulators last September, JPMorgan took pains to distance itself from Belt's idea, supporting buyouts only by "institutions and structures that are well regulated" and "subject to high standards of financial strength and stability."

BACKUP PLAN

But even if Congress rejects every element of the proposal, at least some Wall Street firms will dip their hands in the pension fund honeypot. They could follow Britain's lead, where companies offload pension assets by purchasing a group annuity from an insurer. The market took off 18 months ago, when British regulators instituted stricter pension-accounting standards. Since then, nearly a dozen small, specialized insurers have begun offering the investments, many backed by Goldman Sachs, JPMorgan, Cerberus, Warburg Pincus, and Deutsche Bank—some of the same firms leading the charge in the U.S.

A dozen U.S. life insurance companies, including John Hancock, Prudential, and MetLife, already offer a way for companies to get rid of their pension burdens through such annuities. Although the market remains small, insurers sold $2.88 billion worth of policies last year, triple the amount three years ago. If Congress stymies Wall Street's frontal assault, big firms could switch to Plan B, setting up little insurance subsidiaries to offer those types of annuities. There's no end to Wall Street's creativity when billions of dollars in assets are up for grabs.

Goldstein is a senior writer at BusinessWeek.