More About Private Equity Funds and Pension IOUs

As I discussed in my July 29, 2013 blog post entitled "Pension Liability Price Tag For Private Equity Funds And Their Investors," a recent court decision by the First Circuit could mean the difference between "good" deals and "bad" ones. In "Doubling Down on a Bad Bet: Liability for Portfolio Company Pension Obligations After Sun Capital" (August 5, 2013), ERISA trial attorney with the McCormack Firm, Stephen D. Rosenberg refers to this legal opinion as "tremendously significant" as it will directly impact how acquisitions are structured, "in terms of examining whether it is possible to legally structure the acquisition and ownership of a portfolio company in a manner which will insulate the acquirer from unfunded pension obligations or, if it is not certain whether that can be achieved, will at least make it as hard as possible for potential plaintiffs to recover, thus hopefully dissuading future lawsuits..."

As creator of the popular and insightful Boston ERISA & Insurance Litigation blog, Attorney Rosenberg talked about the imperative to think ahead. Instead of trying to fix a problem after an acquisition has take place, he references my recommendations, as a business expert, to thoroughly value "the pension exposures of the target company" and account "for that exposure financially in the purchase price."

School is still out as to whether these actions are being done to the extent they should be. I have worked on due diligence initiatives that included a forward-looking assessment of cash needs and investment considerations. However, if everyone was tackling this type of economic analysis, in conjunction with a legal review, there would be no headlines about post-deal pension surprises. In other words, there are obviously some buyers that have not done sufficient homework and end up paying more than they had anticipated. If that happens too often, a private equity fund's general partners are ultimately going to get push back from their limited partners such as other pension plans, endowments and foundations. Why? Post-transaction costs impede performance.

Attorney Rosenberg and I both agree that doing the right things, prior to the closing of a transaction, is a good offense. As relates to pension-centric due diligence by a private equity fund, he adds that "Do that correctly, and you have already accounted for the possibility of being forced to cover the portfolio company's exposure; do that incorrectly, and you may have - as occurred in Sun Capital - doubled down on a losing proposition."

Withdrawal Liabilities, Corporate Sponsors and Union Members

Like many others, union members are grappling with a jittery economy and its impact on plan sponsors. As a result, companies are exploring ways to restructure employee benefit plans in order to contain costs and still keep pension promises.

Just yesterday, Pensions & Investments' Barry Burr wrote that United Parcel Service, Inc. ("UPS") is paying $1.2 billion as a withdrawal liability to the New England Teamsters & Trucking Industry Pension Plan. In exchange, and subject to approval by its employees who are union members, UPS will not have to pay for other companies' employees. According to "UPS to leave New England fund, strikes funding deal," the popular delivery company will write a check every year over the next half century for $43 million. An accounting charge of $896 million will be recognized in this year's financial statements.

On August 28, 2012, Dow Jones Newswires explains that UPS sees the creation of this new pension plan - to replace the old one - as "being fair" to multiple constituencies such as shareholders as well as to employees.According to "UPS Restructures Pension, Sees $896 Million 3rd-Quarter Change" (, August 28, 2012), over 10,000 employees will be affected.

The action did not go unnoticed by at least one rating agency. On August 28, 2012, Standard & Poor's explicitly referenced the company's liability exposure to multi-employer plans as part of its rating assessment of UPS and added that the IOU is seen as a "debt equivalent" and "significant."

The take-away points are clear.

The large and long-lived costs associated with offering ERISA plans continue to dominate the discussions in numerous corporate corridors. Besides having to infuse cash (sometimes billions of dollars), company plan sponsors may be in danger of ratings downgrades. A drop ratings boots the cost of capital which in turn narrows the universe of positive net value opportunities that help to grow enterprise value. Funding issues with employee benefit plans could force M&A deals to evaporate.

Expect other companies to announce pension restructurings.

What remains to be seen is whether a showdown between shareholders and participants will ensue with either or both groups asking ERISA fiduciaries to justify the terms of a particular deal in court.