Pension regulator targets buyouts

The Pension Benefit Guaranty Corporation plans to become more aggressive in scrutinizing buyout transactions.

The Pension Benefit Guaranty Corporation (PBGC), the government's pension insurer, will take a more active role in scrutinizing private equity transactions, according to its head of negotiations and restructuring group, Sanford Rich.

In an interview with Pensions & Investments, Rich said that “if you are a private equity shop purchasing some of the assets of a company, and it will deteriorate the credit of that company, assume that we will be there”. He added the PBGC will become “more aggressive now” in evaluating private equity acquisitions of companies with vulnerable pension funds. 

The Employee Retiremen Income Security Act of 1974 (or ERISA) allows the PBGC to terminate a pension plan if, among other things, the loss to the PBGC is expected to increase unreasonably if the plan is not terminated. If the PBGC threatens to terminate a plan before a buyout transaction closes, the PBGC may be able to make a claim against the plan sponsor and all of its affiliates for the unfunded plan liabilities, according to a client memo from Debevoise & Plimpton, a law firm. 

It is this liability that “makes it unlikely that the parties and the lenders will proceed”  thereby potentially scuttling the transaction, the memo continued. 

Using government supplied data, the PBGC regularly monitors companies with large pension plans or that appear to be underfunded. If a pension plan appears to be at risk, the PBGC will contact that company for further information, and potentially negotiate protections for the pension plan on a company's behalf.  

On its website, the PBGC said it is particularly concerned about transactions that “substantially weaken the financial support for a pension plan, such as the breakup of a controlled group, a transfer of significantly underfunded pension liabilities in connection with the sale of a business, or a leveraged buyout”.