U.S. GAO Addresses Pension Buyouts by Financial Firms
Hot off the presses, the U.S. Government Accountability Office has just released "Proposed Plan Buyouts by Financial Firms Pose Potential Risks and Benefits" (March 2009). You may recall that the IRS put the kabosh on defined benefit liability trading on August 6, 2008, leaving it up to Congress to approve of disprove. See IRS Revenue Ruling 2008-45.
I've always been intrigued by the concept of a secondary trading market in pension liabilities but wondered how one might identify and manage the many risks. Essentially, the authors of this new study assert the same concerns.
"The troubling aspects of DB plan buyouts involve risks that may be difficult to foresee or quantify now or at the time of any particular transaction. It is unclear to what extent buyouts would cost less than standard plan terminations simply because of differences in regulations facing financial institutions and insurance companies providing similar services to plan sponsors instead of from economic efficiency. Further the current economic downturn has laid bare the current weaknesses and imperfections of financial regulation, with banks and insurance companies previously considered to be sound and well capitalized suffering catastrophic losses."
From a fiduciary perspective, is there clear and present danger in the form of conflicts of interest or concerns about choosing a "proper" trading entity? (Refer to 29 CFR 2509.95-1 - "Interpretative bulletin relating to the fiduciary standard under ERISA when selecting an annuity provider " for possibly analogous guidance.)
As a plan participant, I'd want to know much more about who will ultimately sign and send my check. As a plan fiduciary, absent explicit guidance, I'd need to know more about how to discharge my duties on behalf of retirees when passing the baton to a major bank or insurance company.
