WASHINGTON -- Would you feel comfortable if your company sold off your pension plan to a big bank?
This month, Citigroup Inc. got the green light from the Federal Reserve for an unusual deal to take over the $400-million retirement plan of a British newspaper company.
In exchange for getting its hands on all that cash, Citigroup will run the pension plan -- investing the money, paying the benefits and taking on the liability previously borne by Thomson Regional Newspapers. And it's eyeing similar moves stateside.
Let's not mince words here. There is no upside for the workers and retirees. Federal regulators should put a stop to this immediately. If Citigroup (yes, this one) can convince the plan sponsor that it can provide financial management services in the most efficient manner, then the plan sponsor should be allowed to employ Citigroup for its investment management. However, the plan sponsor must still be the entity that guarantees the pension payments to the plan participants. The plan participants should always have recourse to the plan sponsor. That should not be outsourced.
Read the whole article. If you are like me, you will roll your eyes, possibly to the point of permanent damage, when you get to this part:
Ari Jacobs, head of the Retirement Benefits Advisory Group at Citigroup in New York, said American employers seemed "very interested in opportunities to reduce or eliminate the risks associated with their pension plans." He added: "We in the U.S. are looking at a similar model" as the British deal."
A lot of these companies -- including some that are our clients -- are asking, 'What are our alternatives now that we've frozen the pension plan?'" said Scott Macey, senior vice president and director of government affairs for Aon Consulting.
Until now, the alternatives have been to pay off workers with cash or to buy annuities from insurance companies, which then continue to pay the benefits.
But now, financial companies such as Citigroup say they could do the job more cheaply than insurance companies -- and with greater expertise at managing risk. Insurance companies, for example, face costly state-by-state regulation that pushes up the price of annuities.
"As a financial institution, we believe we're better at managing financial risk than anybody else," Citigroup's Jacobs said. "That's our core business."
(Yes, that Jacobs fellow seems to be talking about the risk management virtues of this Citigroup.) If the plan is frozen, then the plan sponsor can simply prefund the present value of expected payouts with purchases of government bonds and eliminate interest rate risk by duration matching the bonds to the expected payouts. That's all that needs to be done if what is being done is purely in the interests of the plan participants, and any number of financial services or insurance companies could be contracted to do it.
The reason plan sponsors perceive there to be risk is that they feel like they should be using the pension fund to invest in stocks, so that they can claim the risk premium in the present value calculations of their obligations and prefund them with less money today. That sleight of hand is what generates almost all of the problems in pension regulation.
And where there are investors looking to get something for nothing, there will be investment firms willing to give them nothing for something. Normally, I'd say they are a perfect match for each other, except that in this instance, they are playing with the pensions of workers and retirees.