New Initiatives Regarding Pension Plan Freezes

 The DB system continues to contract. With new FASB disclosure rules and greater funding volatility under PPA, additional DB plan freezes can be anticipated. Last year a number of healthy major companies announced plan freezes.

Once a plan is frozen, it may present a number of long-term regulatory issues for the plan sponsor. But perhaps more importantly, in a typical situation, a plan sponsor may look at continuing to sponsor a frozen DB plan as more of a required nuisance than something it is really interested in doing. And, some of the factors that probably generated the freeze in the first place (e.g., FASB and funding volatility) continue even with a frozen plan. We understand that many companies with frozen plans would prefer that they not have to continue sponsoring them, with all that that entails.

Most of these companies are probably waiting until asset values can cover the costs of acquiring shared annuities. However, the insured annuity market has limited capacity to date and, of course, represents an expensive alternative for a company that wants to rid itself of pension liabilities.

Recent press and other reports have indicated that a number of large Wall Street and other financial institutions have an interest in "acquiring" frozen plans at a lower cost to sponsors than insured annuities. The plans would continue to be maintained by the acquiring institution which would assume all funding and other legal obligations for the plan. The acquisition of the plan would occur through the vehicle of a business acquisition of a subsidiary of the employer sponsor. The subsidiary would assume responsibility for the plan prior to the business acquisition. Employer sponsors would have to contribute some cash or other assets to the business transaction representing the negotiated determination of any plan underfunding (although such amount would presumably be less than would be required to purchase insured annuities). These assets would be dedicated to the pension fund, but held in a "side-bar" non ERISA vehicle.

The benefit to plan participants would be the plan would remain subject to ERISA, carry the PBGC guarantees, and reflect enhanced security because of the additional dedicated assets as part of the business transaction. The benefit to the historic plan sponsor is that it has rid itself of the plan in total and everything that goes with it in a responsible fashion. Presumably, the acquiring institutions would make money through enhanced investment portfolio techniques which would allow it, over time, to not have to contribute the entire dedicated additional asset funds to the plans. We understand that well-capitalized entities with significant capital dedicated solely to acquired plans would be involved in these transactions. These tranasctions could apply to plans in whole or to just the terminated liabities of such (e.g. retirees and terminated vested).

The transactions would seem to be permissible under existing law if properly structured. No doubt, PBGC would have a strong interest in assuring plan security and its own well-being.