Can one get rid of a company's pensions during LBO?

chips_ahoy's picture
Rank: Baboon | banana points 139

Hi guys:

For companies with large pension obligations, is it possible to get rid of them during LBO through some kind of structure, or would that only happen during bankruptcy? Thanks!

Comments (43)

Mar 24, 2019

IMO you cannot avoid paying your pension liability. I believe under certain circumstances you can restructure the plan by funding the gap and closing the plan while at the same time enrolling new employees under a different scheme (defined contribution)

Funniest
Mar 24, 2019

This is why everyone hates wall street

edit: wtf how did i get so many bananas

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Mar 24, 2019

Edit since my words were so shrilly and hyperbolically taken out of context.

Can you - maybe, see my more serious comments below. My personal opinion is that as a capitalist it is my obligation to pay taxes, not provide health care, a funded retirement, or any other social programs. I believe these are government responsibilities and I am happy to fund them through taxes, but I don't believe those obligations should be on my shoulders as a private employer. and, therefore, I prefer to avoid them when possible.

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Most Helpful
Mar 24, 2019
Distressed Industrial Buyer:

Probably. My personal opinion is that as a capitalist it is my obligation to pay taxes, not provide health care, nor provide a funded retirement, or any other social bullshit. I believe they are government responsibilities or not, but I don't believe those obligations should be on my shoulders and, therefore, I prefer to avoid them when possible.

Jesus Christ...
You're arguing that you shouldn't provide what you're contractually obligated to provide to your employees, per their employment contracts, because you personally don't believe in funded retirement?

I'm sure you'd also be fine if your employer arbitrarily decided not to pay you a salary for a few years if your boss didn't believe in motivating employees through monetary reward?

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Mar 24, 2019

You or someone obligated to pay them as part of a comp package. In this case you as the pe firm(i assume) accepted these liabilities whenpurchasing the company

This is something you pay because you agreed to it.

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Apr 14, 2019

The "I'm a capitalist, so I want the government to provide funding for healthcare, retirement funding, & social programs" logic doesn't follow at all. From a free market point of view, all of those things should be provided at the option of an employer, the government certainly shouldn't provide the former two, and should drastically cut its funding of the lattermost.

I come from down in the Valley, where Mr. when you're young, they bring you up to do like your daddy done.

Mar 24, 2019

APA and don't take on the pension liability?

(this was a joke fwiw)

Mar 24, 2019
m_1:

APA and don't take on the pension liability?

Lol

Apr 3, 2019

Amen!

Mar 24, 2019

Oh man, worked on this situation during my internship. Wish I could talk about it, but I can say there were some really creative solutions (i.e. along the lines of spinning of pension liability and selling it off to a distressed investor)

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Mar 24, 2019

There are options. Distressed situations give you more flexibility. In one situation we just got the assets and let the PBGC and former owner figure out the pension. In another we 'termed out' (probably not the correct word) the pension and in a 3rd we termed out part and carried the other part. Canada recently tightened up their regulations regarding pension transfers in a sale.

Apr 3, 2019

We've done a similar move to avoid the PBGC and forced the seller to deal with it on their own terms. This is probably the cleanest way to carve out pension liabilities, but would be interested if other people know a better solution.

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Mar 25, 2019

question is to what degree they are funded or not - obligations are not an issue if there are assets. Traditionally as sponsor you had to overfund them on the asset side slightly in buyouts. You can also move them off balance sheet via a bulk and other structures - that however also required overfunding. I dont think you can just make them dissapear if thats what you mean. If they are funded they dont affect you really so its not that much of an issue

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Apr 3, 2019

I came to this thread hoping to learn something about accounting and/or transaction dynamics. My hopes were abruptly destroyed.

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Apr 3, 2019

Most of this thread: Sure! You can get rid of pension liabilities! All you have to do is pay it off, or have the seller pay it off! Or not have a liability to pay off!

From an intellectual curiosity perspective, I'm equally disappointed. As someone who one day hopes to collect his pension, I'm fairly relieved.

Apr 4, 2019
HighlyClevered:

As someone who one day hopes to collect his pension, I'm fairly relieved.

you're not out of the woods, yet.

https://www.washingtonpost.com/business/economy/as...

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Apr 15, 2019

full disclosure, this is way outside my wheelhouse

one thing I do know about pensions is once it reaches 110% funded status you can offload the liability to an insurance company. so perhaps you could redirect portions of retained earnings to the pension until it reaches that funded status and then annuitize it with an insurance company.

alternatively, you could offer buyouts to some employees (many will take them) this lowering the overall liability

finally, and this is a wild ass idea, you could give the pension some LP ownership of some of your firm's other funds, get good returns, it gets overfunded, and then you offload it.

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Apr 3, 2019
thebrofessor:

finally, and this is a wild ass idea, you could give the pension some LP ownership of some of your firm's other funds, get good returns, it gets overfunded, and then you offload it.

Very cool idea, but I have to imagine that leaves you open to all sorts of fiduciary legal liability if there's any way to construe under performance.

Apr 4, 2019

I feel you gotta be a real scumbag, like truly fucking dirt, to try to axe pensions. Those are human beings who worked hard for those pensions they were contractually promised. This really is why everyone hates wall street, and even though I work there, I totally agree when it comes to stuff like this.

Dayman?

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Apr 4, 2019

The real question is would you believe me if I told you I'd gove you money 30 years down the line? Simple answer: No.

So why do people believe in pensions? So much can happen in 30+ years - ie a company can go bankrupt, change the system...

I love how people firmly believe that pensions are a given. Pretty sure none of us (talking about students to Associates) will have pensions matching the current pension system. Best way to hedge against this risk: have your own self funded pension.

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Apr 3, 2019

Agreed that any practical person with means to do so should plan for retirement as if the pension won't be there.

But that doesn't change the fact that, if you agree to pay me 30 years from now, a contract is a contract. And if I find out that you got out of that contract by selling the company to a firm who paid itself dividends to the point of bankrupting the company, my anger is justified.

Apr 4, 2019

Agreed but the contract could be broken if say the company was to get into bankruptcy. I agree that the company shouldn't get into bankruptcy for the benefit of its owners by removing the pension liabilities.

I am not too familiar with US pensions liabilities - but where I am based if an employee leaves before retirement age is reached the liabilities will go to 0. So that's also something to take into account aka - there are many ways a company can fuck you over in regards to pensions liabilities.

Apr 4, 2019

Someone please take away Martin Schkreli's prison phone and WSO access.

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Apr 15, 2019

Leave my boy Schkreli alone.

Apr 11, 2019

Try doing this and see how many pension-eligible employees are motivated post-trxn

Apr 15, 2019

Dumb question but since we're here, as someone with zero knowledge in this space, does employee productivity/expertise figure into valuations, etc. at all, or is it not counted as an asset? I keep hearing horror stories from friends in the about their company getting sold and then trashed by the new owners. Soon everyone leaves and nobody knows how to work the codebase anymore. I can't imagine the new owners are getting their money's worth at that point.

Apr 11, 2019

Sure you can. Most commonly, the company can offer a lump sum payment to individuals within the plan to buy them out based on their defined benefit. Alternatively, the company can purchase an annuity contract from an insurance company. The insurance company taking over a company plan must honor the rules of the plan document, so any features and options available to a participant must remain the same. This is often done to address an underfunded pension position, and becoming increasing popular as administrative costs rise and pension liabilities become more transparent.

The liability comes off the balance sheet in both cases.

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Apr 12, 2019

This.

The only problem is that the annuity contract is usually close to being as expensive as funding the plan itself.

Lump sum is the way to go if you're hellbent on getting rid of the plan promised to the workers who built the company you are trying to acquire.

Apr 15, 2019

Define get rid of? Get rid of like walk away from a contractual obligation? Or get rid of as in structure some sort of buyout?

Now if its the latter...I'm sure there can be various structures that can be negotiated with the union/employees at time of acquisition - lump sum payments, material increased compensation levels, equity, etc.

If its the former - then there is so much going on here its pretty wild. Lack of understanding of accounting: underfunded / funded pensions. Lack of understanding of ethics: trying to screw people over in a takeover transaction to juice returns. Lack of understanding of strategy: the entire work force would quit and you'd now own a useless asset. Lack of understanding of liens: the underfunded pension would be unsecured creditors. Just to name a few.

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Apr 15, 2019

Not directly on point, but IMO, the concept of defined benefit plans is ludicrous. Unless the plan could meet its obligations by investing 100% in US Treasuries (which it can't), it is magical thinking to "guarantee" benefits. No investment that is so low risk as to be virtually risk-free is going to generate enough return to cover pension liabilities. Should the people that expected to receive them be screwed over just for the sake of maximizing corporate profits? Of course not. But if it truly cannot be funded (e.g. Chicago teacher's pension fund) I do not think the government should step in with taxpayer money and bail it out, or jack up taxes to cover it. Be a fucking adult - life happens. If you're dumb enough to think that someone can 100% guarantee a defined payout to you 30+ years into the future and you have no fall back plan, that is on you.

Let the monkeyshit commence.

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Apr 3, 2019

You're all over the map.

You're right that there's no such thing as a 100% guarantee in life, but the notion that you need to be invested 100% risk-free to meet pension obligations is... not correct, or wise, or the issue.

Generally, pensions aren't underfunded today because of poor performance of risk assets. They're underfunded because plan sponsors haven't made the necessary cash contributions to keep the assets in line with the liabilities. Every year these sponsors get a report from their actuaries that say "You should make a contribution of $X million dollars today and plan to make contributions of $Y million dollars going forward to stay healthy." And plan sponsors say "Ok cool report. We'll contribute $0 today because we can't afford it, but maybe we'll do better next year."

The concept of a DB isn't ludicrous - it's actually pretty ingenious. As a system it largely worked for a couple of generations. But now its impractical in our modern political climate where we can't elect anyone who will do anything but kick the can down the road. Is that the fault of the Chicago Teachers? Certainly not entirely. The taxpayers should have elected more responsible officials who didn't cow to their demands, and who actually contributed the necessary tax dollars. There's plenty of blame to go around, and one way or another taxpayers will have to shoulder some of the burden.

Apr 15, 2019

I appreciate your perspective, but I feel like we are saying the same thing in different ways in terms of why many pensions are underfunded. While you attribute the underfunding to either the reluctance or inability of the pension's sponsor to actually contribute what they should, I am saying that, given this inadequate contribution, there are no suitable assets to compensate for this lack of contributions. Why do you think so many pensions have turned to hedge funds, alternative assets, less-than-investment grade bonds, etc. in a desperate attempt to meet their obligations? Because they have not contributed enough along the way and cannot contribute enough now to fill the gap.

It's not an either/or issue of malinvestment of the pension's funds or insufficient sponsor contributions --- both causes are interrelated. It is the same as saying, giving what I am willing to contribute my 401k or IRA, I cannot find an investment that generates a high enough return with acceptable risk to yield a FV of whatever arbitrary amount I want to have at retirement. To say they should have simply contributed more misses the point. There was never any expectation that the liabilities could be fully funded by simply contributing X amount per year and kept in cash or US Treasuries. Given what they were able or willing to contribute, they should have known there was was no way to invest the money to generate enough return to meet their obligations.

I can't expect to retire with a million dollars by contributing 10 dollars a month and investing my entire portfolio in junk bonds and penny stocks. I either need to contribute more or accept the fact there is no way to invest that will compensate for my insufficient contribution.

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Apr 15, 2019

Yes and no. You're conflating an individuals decision at managing his/her individual retirement with a compensation package that was offered to an employee. For the sake of analyzing a current pension we must set aside whether or not pensions are fair or unfair, smart or dumb, as the decision to have one is made.

When an employee joined the firm, the contract had a pension stipulation that was part of the overall compensation package. Everyone knew this - the company and the employee. Its up management to decide how to fund its expenses and in many situations companies, not the employees, chose to underfund. Basically, pensions are delayed compensation and its managements missteps (yes also falling rates...but this didn't happen over night) not poor individual choice that led to this predicament. All along the way the company could have funded its obligations and maybe dropped margins by a point or two but choose not to likely as a mean of increasing stock price, more cash for dividends, etc. To shift blame to the employees is simply wrong.

No one demanded something that wasn't ascertainable with an arbitrary number as you put it, and would be the case of an individual not contributing enough to an IRA/401k. The company did the math, conscientiously chose to underfund, and now the employees are caught holding the bag.

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Apr 15, 2019

Martin Sheen would be so pissed at you.