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reviewing the takeovers financed by four of the LBO funds in which the plan sponsors invested, we found that 8 of the companies that were taken over terminated pension plans.


In summary, almost 40 percent of the companies that were taken over in LBOS terminated 107 defined benefit pension plans with reversions of excess assets of over half a billion dollars, most of which went to the plan sponsors. For 43 of the 107 terminations, the sponsor intended to cover the participants with a new pension plan or an existing or spin off plan. Many of the new plans to be established were defined contribution plans.

The eight pension plan sponsors we contacted have invested a relatively small portion of their assets in LBO funds and have received higher returns than achieved on other plan investments. Further, the plans appear to have been selective in choosing LBO funds in which to invest and have diversified their investments among different funds. Four of the LBO funds in which the plan sponsors invested had financed LBOs of 8 companies that terminated pension plans.

We are continuing our work in this area to determine (1) what the role of the LBO is in the decision to terminate these plans and (2) how the terms of any follow-on plans established for company employees compare to those of the terminated plans.

Mr. Chairman, this completes my statement. I would be happy to answer any questions at this time.




To identify the number of LBOS, we used information from a study coauthored by the Chief Economist of the Securities and Exchange Commission that identified 284 public companies for which LBOS were announced3 from 1980 through 1987.

the number of companies by 94 for several reasons.

We reduced

We excluded 24 companies because we could not identify either a reliable date on which the LBO occurred4 or a valid employer identification number used for tax purposes. We excluded another 40 companies where the LBO was announced during 1980 and 1981, because our data base of pension plan annual returns (forms 5500) did not go back far enough to enable us to identify the number of plans each company sponsored in the year preceding the LBO. Twenty-five companies were excluded because we were not able to identify any pension plans for the company's employer identification number. Finally, we excluded five companies because we could not obtain asset or participant data for the plans they sponsored.

As a result, we focused our analysis on 190 companies for which LBOS were announced from 1982 through 1987. These companies sponsored 656 defined benefit plans with $10.8 billion in assets, covering 920,691 participants.

We used pension plan annual returns (form 5500) to identify terminated defined contribution plans and determine their characteristics. PBGC does not insure defined contribution plans, and, therefore, does not maintain information on them. We found that the 190 companies sponsored 243 defined contribution plans with $4.9 billion in assets covering 731,710 participants.

It is possible that there were pension plans that we did not identify because the form 5500 data base is incomplete or the plans' tax returns were filed under a different name or employer identification number. Also, this data base excludes plans with less than 100 participants that file different returns.

We used PBGC's pension plan termination data base to identify (1) defined benefit plans sponsored by companies in the LBO data base that had been terminated, (2) the reason for the termination, (3) whether there was a reversion of excess assets to the plan sponsor, and (4) whether the sponsor intended to establish a replacement plan. To determine when the plan termination occurred in relation to the LBO, we compared the date of plan termination to the date on which the LBO was announced and the date on which it occurred.

We identified several plans with over 100 participants that were not included on our form 5500 data base. We used PBGC asset and participant data for these plans.

3The date on which the LBO was announced represents either the date on which (1) the Wall Street Journal reported that an investor had expressed an interest in acquiring a company in an LBO, (2) an investor notified the Securities and Exchange Commission of its intent to pursue an LBO, or (3) the company's board of directors announced that they had agreed to an LBO.

4 The date on which the LBO occurred represents the last date on which the company's stock was publicly traded.

Chairman PICKLE. Thank you, Mr. Delfico.

Mr. Delfico, why are the defined_contribution plans growing as opposed to the defined benefit plans?

Mr. DELFICO. A couple of reasons that have been reported are that defined contribution plans are easier to administrate by a company, so there is an incentive to change from a defined benefit plan to a defined contribution plan. Of course, the other side of it is that a defined contribution plan shifts the risk to the participant. Chairman PICKLE. I listened to your statement about the number of plans you examined. It looks to be like a lot of the plans that are overfunded, are being targeted in these LBO's. Is that a fair analysis to make?

Mr. DELFICO. Yes, we noted that is the case for 40 percent of the companies in our termination data base.

Chairman PICKLE. That is a fundamental truth we have to accept, don't we?

Mr. DELFICO. I think the PBGC study has shown the incidence of terminations are higher for LBO's than for terminations in general, so there is an indication of that.

Chairman PICKLE. Mr. Schulze?

Mr. SCHULZE. Thank you, Mr. Chairman.

That means in 60 percent of the cases it does not, so the preponderance would be it is not a determinant. Is that correct?

Mr. DELFICO. That is correct, in 60 percent of the cases companies did not terminate plans. I would like to clarify another point. I didn't mean to imply that the overfunded plan itself was the reason for the LBO. It may be one factor, but determining the causal link between the termination and the LBO is very difficult to do, and we haven't done that to date.

It is just a correlation, and that is the state of our analysis. Mr. SCHULZE. Have you reached any conclusions as to why pension plans are terminated following leveraged buyouts?

Mr. DELFICO. Right now, it is speculation. We spent 6 weeks gathering the data and analyzing it, so we don't know why. We will be talking to plan sponsors in the next phase to find out answers to that particular question.

Mr. SCHULZE. In earlier questions, I stated it seemed to me to be normal in the acquisition process that a larger company would most often be taking over a smaller company. It seems to be logical that their pension fund would be the survivor of the two, and that the smaller company's pension fund would be dissolved, and folded into the other.

Is that a logical sequence of what happens, or is that not what happens?

Mr. DELFICO. Well, some of the LBO's we looked at, that had plan terminations after an LBO involved investment groups. However, we didn't look at all mergers and acquisitions.

So, I am not prepared to answer that particular question.

Mr. SCHULZE. What portion of takeovers and acquisitions are done by financial groups rather than a company acquiring other companies?

Mr. DELFICO. We don't know the answer to that one.

Mr. SCHULZE. If it is one-half of 1 percent, it is really not much of a problem. If it is 80 percent of acquisition, then it seems it could

be a problem. Mr. Delfico, in your statement, you indicate you have examined the LBO transactions of 190 companies sponsoring 656 defined benefit plans and that 60 of those companies terminated 107 defined benefit plans subsequent to the LBO.

Were the 107 plans which were terminated more or less overfunded than the remaining 549 defined benefit plans which were not terminated?

Mr. DELFICO. We know the 107 by and large were overfunded. Do we have any information on the other?

Mr. HUGHES. Sir, we do not know the funding status of the other plans. For the terminations, we were able to look at PBGC records and determine their funding status.

Mr. SCHULZE. Are we looking at this in an unbiased way or are we going predetermined we want to make a case? Because it seems if the others were overfunded, it refutes the premise that this is the driving force.

Mr. DELFICO. Our focus was to look at plans that were terminated, and that was our starting point after an LBO. You are right, there were some plans that kept going. We haven't looked at whether they are overfunded or underfunded.

Mr. SCHULZE. Is there a relationship between the additional debt taken on by the company and the amount of money that subsequently reverted in the termination of the overfunded pension plans?

Mr. DELFICO. I would say there may be a correlation between the debt and the amount of terminated money in the pension fund. Mr. SCHULZE. Can you put a percentage on that relationship? Mr. DELFICO. We can in our study. Right now, we are not prepared to talk about that.

Mr. SCHULZE. Thank you, Mr. Chairman.

Mr. DORGAN [presiding]. Thank you, Mr. Schulze.

Mr. Delfico, the GAO, in reviewing the impact of pension plan investments on LBO's concludes they have generally been very profitable for the pension plans, I guess. The yield generally is a result of risk; is it not?

Mr. DELFICO. It correlates with risk, yes.

Mr. DORGAN. So the profitability of the investments and the instruments that are involved in LBO's provide higher yield because they are significantly higher risk; is that right?

Mr. DELFICO. That is one line of argument, yes. I don't think there is high risk as may appear in this. We looked into a number of LBO funds. The funds themselves are diversified. There are a number of LBO's that are going on within a particular fund, so if one fails, the fund doesn't necessarily fail.

We have not found any indication of failure in any of the funds we have looked at. When you compare that to the return, one might say that the return and the risks sort of balance.

Mr. DORGAN. Are you familiar with the term PIK's as it relates to junk bonds, payment-in-kind?

Mr. DELFICO. We have come across that term, yes, but we haven't reviewed junk bonds.

Mr. DORGAN. The reason I asked the question is there are a lot of techniques being used in the placement of high-yield instruments. Some instruments are zero coupons that defer interest well into

the future, while others have payment-in-kind features. Still there are others in which the interest is unable to be paid, and so they revert to an equity instrument in order to avoid default. This tends to freeze the default rate so that folks would testify and say there is less problem here than we thought, because there has not been substantial default. This is despite the fact they have used a littleknown conversion technique under SEC law to convert a junk bond that can't perform into an equity instrument.

Some, of course, suggest it was an equity instrument all along masquerading as debt for the purpose of deductibility. That gets way away from our discussion.

Mr. Delfico, thank you very much. Let me ask the chairman, who has just come back from attending a caucus in the other room, if he has additional questions?

Chairman PICKLE. Thank you very much. [No questions were submitted.]

Mr. DELFICO. Thank you, Mr. Chairman.

Next is Mr. Tom Donahue of the AFL-CIO.

We are pleased to have you. If you will please proceed, your entire statement will be made a part of the record.


Mr. DONAHUE. Thank you.

I am accompanied this morning by Meredith Miller, our employee benefits specialist of the AFL-CIO, and by Ernie DuBester of our legislative department.

Mr. Chairman, we are grateful for the opportunity to appear, grateful for the time you take in these hearings. We think that it is appropriate to take a hard look at the serious threats that LBO's pose for workers' pension benefits, security, and we have testified in a number of fora to it, as to the various effects of those LBO's. That activity is still on the rise and the motor gauging of our economy is reflected in the rise of corporate debt from 34 percent in 1983 to 42 percent in 1988, the debt which we think threatened our power to produce and our power to compete in the world economy.

Mr. Chairman, the total damage of that takeover activity and LBO activity, although still on the rise, hasn't yet been assessed in terms of the total damage of the trend to workers' communities in our economy.

One small and preliminary fact is that we know that we have lost at least 90,000 jobs, 90,000 jobs of AFL-CIO union members have been stripped because of takeover and LBO activity.

In terms of the effect of that activity on our pension funds or the interactions of the two, Mr. Chairman, I would just note that our pension plans represent 43.5 percent of all the institutional holdings in this country. They currently represent about 24 percent of the equity markets and 15 percent of the total bond market.

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