US - The pension fund buyout model may strengthen defined benefit (DB) plan provisions but could also pose unquantified risks to the system, a report by the Government Accountability Office (GAO) has said.
As a result, the Treasury said new legislation was needed in order to allow buyouts to progress. The GAO said the ruling, combined with the current economic climate and legislative efforts surrounding financial institutions had pushed DB buyout off the immediate agenda.
Despite this, the GAO did argue there were potential advantages to be had from the creation of a buyout market - notably making benefits more secure and reducing the overall exposure of the Pension Benefit Guaranty Corp (PBGC).
The report stated: "If such buyouts represented new level-playing-field competition to insurance terminations, with no added risk to participants or to PBGC, they could be seen as a financial innovation that increased flexibility and lowered cost to DB sponsors."
However, GAO said even if buyouts were introduced as a successful model, it could erode worker benefits by either placing the retirement scheme with an outside agency where interests may not be aligned, or encourage sponsors to freeze and terminate plans prematurely in order to enter into buyouts.
Also, as the financial crisis brought into sharp relief, the GAO said there were concerns over concentrating assets with single sponsors or sectors, with the potential, if slight, risk of a large claim being brought against the PBGC in the event of another systemic failure.
It noted: "The current economic downturn has laid bare the current weaknesses and imperfections of financial regulation, with banks and insurance companies previously considered to be sound and well capitalized suffering catastrophic losses."
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