Consumers : Takeovers May Affect Retiree Benefits
Question: I am a longtime retiree from a large U.S. corporation. I receive a pension from them and also have a paid-up medical supplementary policy. Both of these were funded partly by me when I was employed. Is it possible that, in the event of a leveraged buyout (LBO), these could be canceled? Is there any legislation now (or pending) to prevent this--providing the company is solvent?--R.S.
Answer: I’m sure that you know that you’re far from being alone in worrying about the rash of leveraged buyouts sweeping the corporate corridors. Both investors and bondholders are rising in arms. Without going into horrendous detail, an LBO takes place when an investment group undertakes the hostile takeover of a corporation through a financing plan that, primarily, uses the borrowing power of the target corporation to accomplish this.
The raider lines up a circle of investors who agree to buy these securities in the form of “junk” bonds, so-called because of the heavy debt load that the acquired company has to carry to support its own takeover. As a consequence, we’ve seen one financially healthy company after another either forced to sell off profitable assets, or see its credit rating plummet, simply to bankroll its own demise.
Federated Department Stores, for example, had bonds outstanding that were rated near the top of the heap--Aa by the rating service of Moody’s Investor Services--but when the raider moved in with his debt-financed takeover, Federated’s bonds were downgraded to B, which is smack-dab in the “junk” category. Who buys this junk and makes the takeovers possible? Unfortunately, it’s a Who’s Who of pension funds, insurance companies, banks and other financial institutions.
Yield Is High
Why? Because the yield on junk bonds is quite high--at least for the moment--because risk and yield go hand in hand. The higher the risk, the higher the yield. Potential troubles in the junk bond market, however, are beginning to make some of these investors increasingly leery.
So, there’s hope. What particularly bothers you, I think, are reports that one of the attractive assets held by a targeted company--and which catches the eye of the raiders--has been a fat pension fund that the raider thinks he can dip into.
According to George Gamble, an independent benefits and compensation consultant based in Rancho Palos Verdes, the grabbing of these pension assets isn’t as easy as it looks to the raiders.
“Even without knowing the details of this man’s pension setup,” Gamble says, “it’s highly unlikely that a raider would be able to get his hands on the pension. Once a worker is vested--once he has, after five or 10 years of service, a ‘right’ to that pension--it’s pretty safe. And, because he’s already receiving pension benefits, he’s obviously fully vested.”
Once vested, that is, the employee has a right to the benefits he has already accrued--at normal retirement age--even if he is subsequently fired or quits and moves on to another employer. Occasionally, however, a corporation will have excess monies invested in its pension plan--it’s “overfunded” in the sense that it has more assets tied up here than, actuarially, it needs.
The ability of a raider to dip into this overfunding is still a matter to be resolved, but it can’t touch the basic pension pool.
A watchdog over this sort of thing was established by Congress in 1974 with the Pension Benefit Guaranty Corp., to put a halt to abuses in the pension field that frequently left longtime employees on the outside looking in when a company changed the ground rules and cut them off.
“The medical supplement he has,” Gamble continues, “is a little different, though. He says in his letter to you that this, as well as the pension, was ‘partly funded’ by him while he was still employed. With the pension, itself, that’s common enough, but it’s very unusual with medical plans, most of which are funded entirely by the company and over which the company retains the right to cancel, or change it, as it sees fit.
“So, without knowing more details, it could possibly be at risk in the event of a takeover. But not the pension itself.”
Company Was Denied
In one recent court case, Gamble says, an Ohio steel company tried to take away the medical benefits of its retirees, and the court ruled in favor of the retirees and denied the company that right.
“But,” he cautions, “this applied only to this one company and its retirees, and it might not stand up in the case of your letter writer.”
So, that’s the essence of it: In the event of an LBO, the chances are remote to nil that your pension could be impacted. The continuation of the medical plan, however, is one of your benefits that is still shadowy.
