US - The fledgling pension buyout market in the US has been stopped in its tracks, following a ruling from the US Treasury this week that such transactions are unlawful.
While pension transfers have been popular in the UK, where they are known as 'buyouts', interest has also been growing in the US.
Michael S. Melbinger, chair of the employee benefits and executive compensation practice at Winston & Strawn LLP, said the law firm had been advising clients on pension transfers for just under a year.
He said: "Many plan sponsors, union groups, and financial services companies have been exploring this possibility for some time now.
"The ruling will put a temporary stop to our efforts - until such time as the US Congress begins to consider legislation called for in the Treasury Department's 'framework of principles'.
"However, if Congress does get to work on this legislation, our efforts - and those of others in this area - will accelerate."
However, Donald E. Fuerst, worldwide partner, Mercer, pointed out it was unlikely the proposed legislation would be introduced this year, and with a change to the make up of Congress expected next year it was not clear if it would be supported.
He said: "The ruling is unfortunate in some respects in that it is definitely stopping some of these transactions from going forward and some of these transactions could have been very beneficial for all the parties involved."
But Fuerst said the government's move was understandable as under current law it did not have a way to distinguish between good transactions, where the risk was reduced, and bad transactions, where the risk could be increased through the pension fund being transferred to a financial institution that was weaker than the sponsoring company, or to a firm that intended to take additional risk with the fund's assets.
He said: "What [the government] did was it found a way to stop all of the transactions and then proposed they would support legislation that would allow these transactions if they could distinguish between the good and the bad."
Maggie Ralbovsky, managing director, Wilshire, said given insurance companies were already buying up pension funds in Europe, and there was much desire for frozen plan sponsors to unload these plans, a favorable change of legislation would be welcome. She said: "The likely providers will be insurance companies. It is a win-win for frozen plan sponsors as well, as currently it is too expensive to terminate the plan."
Bob Leone, a principal in Hewitt's retirement & financial management practice, agreed it was likely that some of plan sponsors were interested in pension buyouts, or could have been interested at some point in the near future.
He said: "I don't believe any plan sponsor will pursue this opportunity or idea now with the Revenue ruling in place.
"Additionally, while a "Framework for Legislative Change" was also issued, I would expect plan sponsors to see what comes out of the legislative changes before they want to renew any discussions."
Leone added providers who were trying to be innovative in the market would have to slow their efforts. He said: "My guess would be they will turn their attention to lobbying efforts to create effective and manageable legislation.
"Providers who have already invested in this market may look at this as an opportunity to get the door opened with future legislation to allowing the transactions to take place."
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