Compliance April 11, 2016

Private Equity Funds Liable for Multiemployer Plan Withdrawal Liability

A federal district court found private equity funds that owned a bankrupt company are responsible for that company’s multiemployer pension plan withdrawal liability.
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Revisiting an earlier decision on remand from the 1st U.S. Circuit Court of Appeals, the U.S. District Court for the District of Massachusetts found two private equity funds are liable under the Multiemployer Pension Plan Amendments Act (MPPAA) for the pro rata share of unfunded vested benefits owed to a multiemployer pension fund by a bankrupt company, Scott Brass Inc., that is owned by the funds.

In his prior decision, U.S. District Judge Douglas Woodlock, found Sun Capital Partners III LP and Sun Capital Partners III QP, LP, were not responsible for the withdrawal liability of Scott Brass from the New England Teamsters and Trucking Industry Pension Fund. However, the appellate court remanded the decision, directing the District Court to answer two questions: 1) Whether Sun Capital Partners III LP and Sun Capital Partners III QP, LP, are engaged in “trade or business”; and 2) whether the plaintiffs were under “common control” with Scott Brass Inc. within the meaning of Section 1301(b)(1) of the MPPAA.

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To determine if the private equity funds are engaged in trade or business, the court looked at whether the two funds merely invested in Scott Brass or if they received an additional economic benefit from their investments. Woodlock found the funds received an economic benefit in the form of “an offset against the management fees it otherwise would have paid its general partner for managing the investment in” Scott Brass, because Scott Brass would pay the funds management fees. He concluded this meant the funds are engaged in trade or business.

NEXT: Common control?

To determine whether the funds were under common control with Scott Brass, Woodlock turned to Pension Benefit Guaranty Corporation (PBGC) regulations about common control, specifically that a “parent-subsidiary group”—the relevant category in the case—means “one or more chains of organizations conducting trades or businesses connected through ownership of a controlling interest with a common parent organization if ... controlling interest in each of the organizations, except the common parent organization, is owned ... by one or more of the other organizations; and [t]he common parent organization owns ...  a controlling interest in at least one of the other organizations.” A “controlling interest” is defined to mean 80% ownership.

Woodlock noted that, considered separately, one of the fund’s ownership stakes in Sun Scott Brass LLC is 70% and the other’s ownership stake is 30%, both of which separately fall below the necessary 80% threshold necessary to establish a “controlling interest.” However, he found a limited partnership or joint venture existed. “The Sun Funds are not passive investors in Sun Scott Brass, LLC brought together by happenstance, or coincidence. Rather, the Funds created Sun Scott Brass, LLC in order to invest in Scott Brass, Inc.,” he wrote in his opinion. “[I]t is clear beyond peradventure that a partnership-in-fact existed sufficient to aggregate the funds’ interests and place them under common control with Scott Brass, Inc.” So, combined, the funds’ ownership stake was 100%.

Because the private equity funds’ partnership-in-fact is a trade or business and is in common control with Scott Brass Inc., the funds are jointly and severally responsible for Scott Brass’ withdrawal liability from the multiemployer pension plan.

The opinion in Sun Capital Partners III LP v. New England Teamsters and Trucking Industry Pension Fund is here.

Data and Research April 11, 2016

Americans 'Very Worried' About Inflation in Retirement

Americans are concerned that the rising cost of living will affect their retirement years, but these concerns are often overestimated.
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Nearly half of Americans (47%) say they are “very concerned” (36%) or “terrified” (11%) that the rising cost of living will affect their retirement plans, according to a survey from the Allianz Life Insurance Co. of North America.

Thirty-six percent of respondents say they are “very worried” or “panicked” (11%) that rising costs will prevent them from enjoying the lifestyle they want in retirement. In addition, 53% of Americans say they would feel either “very worried” (38%) or “panicked” (15%) about paying for expenses if their income were frozen and they never received an increase in annual salary. Households with lower incomes (less than $50,000 annually) are even more concerned about this.

“This study highlights the potential psychological and fiscal impact of inflation on a person’s financial strategy,” says Allianz Life Vice President of Consumer Insights Katie Libbe. “As consumers move into retirement, they will not only need to consider how to make their income last for 30 years or more, but also how it can cover rising costs driven by inflation.”

Libbe notes that these inflation concerns are often overestimated, as the average inflation rate in the U.S. over the past 20 years was 2.24%. More than one-third of survey respondents, however, believe the cost of living will rise 3% to 4% during their retirement, and nearly one in 10 believe it could increase more than 10% each year.

More than one-quarter (28%) of respondents worry they won’t be able to pay for the essentials, such as housing, food and medical care, because of the rising cost of living. This number jumps to 41% for those whose household income was less than $50,000. The study reveals that the majority (57%) of respondents plan to address rising costs by living more modestly in retirement.

“Consumers can change their lifestyle and invest smartly to manage their finances during retirement. But for added security, they should also explore strategies and products that offer opportunities for their income payments to rise,” Libbe adds. “Many Americans already understand the importance of this concept, evidenced by the fact that more than half of those surveyed said they feel it is very or extremely important that guaranteed income products offer the possibility for income to increase over time.”

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