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Benefits January 25, 2007
Is Sponsorship Transfer Next Frozen DB Plan Solution?
As a growing number of defined benefit plan sponsors
contemplate freezing those programs, a panel of industry
professionals at PLANSPONSOR's 2006 DB Summit predicted the
emergence of a new entity that will not only take on
administration - but might actually become the new sponsor of
the plans.
Reported by Rebecca Moore
conference audio available at http://ww2.plansponsor.com/dbsummit06audio/notice.php – free registration required
The options for managing risks of frozen plans has so far included DB plan annuitization, which can prove costly, especially in today’s low interest rate environment (See Feature: DB – The Point of No Return: Annuitization of DB Plans ), and DB plan outsourcing, which may or may not lower administrative costs and does not relieve plan sponsors of fiduciary liability for the plans (See Feature: DB – The Point of No Return: Off Your Plate ). According to Gary Ford, Groom Law Group, Chartered, the new entities that emerge will provide a better option for DB plan sponsors since, after a company’s due diligence in choosing the best entity to take over its frozen DB plan, the company would be able to turn over fiduciary liability to the new “plan sponsor.”
Ford said he does not think that participants would be able – or perhaps willing – to sue the companies after such a sponsorship transfer, as he says participants will be so much better off. For one thing, Ford said the new entity will not take on debt and that will encourage companies to fund their plans before selling them to the new sponsor. Also, according to Ford, legal protections for companies against lawsuits will likely be negotiated.
Already in the UK
Michael Guarasci, COO and Senior Managing Director, Bear Stearns Asset Management, pointed out the UK is already ahead of the mark with such businesses. In April, Paternoster Ltd., a new UK firm that plans to acquire the assets and liabilities of UK defined benefit pension plans, announced it had raised £500 million ($870.4 million) (See UK Firm to Buy DB Plans) and in June, Duke Street Capital founder, Edmund Truell announced he had gained the approval of the Financial Services Authority for his new corporation, and has raised an amount of money that would allow the company to take on an estimated £4 billion of pension liabilities (See UK Company Garners £400M to Take On Final Salary Plans).
According to Guarasci, these entities differ from insurance companies as they create independent vehicles to secure pension plan assets and receive private capital. Some tools may be similar, but not all assets will be secured through insurance. Michael Gulotta, Chairman, Aon Consulting US, added that the strategies of such entities will likely involve the outsourcing of some obligations will allow for a group purchasing approach.
Guarasci told the DB Summit audience Bear Stearns anticipates the emergence of these new entities in the US within the next 18 months to three years.