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UTILIZATION OF PENSION PLAN ASSETS IN LEVERAGED BUYOUTS AND RELATED TRANSACTIONS

THURSDAY, APRIL 27, 1989

HOUSE OF REPRESENTATIVES,

COMMITTEE ON WAYS AND MEANS,
SUBCOMMITTEE ON OVERSIGHT,

Washington, DC.

The subcommittee met, pursuant to call, at 9:30 a.m., in room 1100, Longworth House Office Building, Hon. J.J. Pickle (chairman of the subcommittee) presiding.

[The press release announcing the hearing follows:]

(1)

FOR IMMEDIATE RELEASE
FRIDAY, APRIL 7, 1989

PRESS RELEASE #6

SUBCOMMITTEE ON OVERSIGHT

COMMITTEE ON WAYS AND MEANS

U.S. HOUSE OF REPRESENTATIVES

1105 LONGWORTH HOUSE OFFICE BLDG. WASHINGTON, D.C. 20515 TELEPHONE: (202) 225-5522

THE HONORABLE J. J. PICKLE (D., TEXAS), CHAIRMAN,
SUBCOMMITTEE ON OVERSIGHT, COMMITTEE ON WAYS AND MEANS,
U.S. HOUSE OF REPRESENTATIVES,

ANNOUNCES A HEARING

ON THE UTILIZATION OF PENSION PLAN ASSETS IN
LEVERAGED BUYOUTS AND RELATED TRANSACTIONS

The Honorable J. J. Pickle (D., Texas), Chairman of the Subcommittee on Oversight, Committee on Ways and Means, U.S. House of Representatives, announced today that the Subcommittee will conduct a hearing to review the utilization of pension plan assets in leveraged buyouts and related transactions.

The hearing has been scheduled for Thursday, April 27, 1989, beginning at 9:30 a.m., in the main Committee hearing room, 1100 Longworth House Office Building. Witnesses representing the interests of the Federal government, business, labor, retirees, and pension plans have been invited to present testimony at the hearing. Other interested parties are encouraged to submit written testimony to be included in the written record of the hearing.

"Earlier

In announcing the hearing, Chairman Pickle stated: this year, the Committee on Ways and Means initiated a comprehensive review of leveraged buyouts and other forms of corporate mergers and acquisitions in an effort to determine their effect on all aspects of the American economy. In deciding what, if any, legislative actions should be considered in connection with leveraged-buyout transactions, it is important that the Committee have complete information on the extent to which such transactions may be jeopardizing plan participants' pension security.

"It is clear that pension assets play a variety of roles in leveraged-buyout transactions. What is not clear is whether the involvement of pension plan assets in such transactions is to the benefit of the plan participants.

"During the course of these hearings the Subcommittee will be considering several key questions:

1. When a company is the subject of a leveraged buyout, what is the effect of the transaction on the company's ability to maintain its previous pension commitments, and is there an increased likelihood that the company will terminate its pension plan in order to recover excess pension assets?

2.

3.

4.

5.

When a company is the target of a hostile takeover
attempt, what is the appropriate role of pension plan
trustees when voting on contested proxy issues?

In resisting a hostile takeover attempt, what defensive
role can a company's pension plans play, and what is the
effect of these defensive tactics on plan assets and
plan participants?

As investors in leveraged-buyout pools, do leveraged-
buyout transactions represent an unreasonable level of
risk to pension plans?

As investors, does the use of high-yield, non-investment
grade bonds (commonly called junk bonds), which are
often associated with leveraged-buyout transactions,
represent an unreasonable level of risk to pension
plans?

"Serious concerns have been raised about the impact of leveraged buyouts on the retirement benefits which people have earned over the course of their entire working career. The long-term retirement plans of employers and workers ought not to be shattered in order to generate short-term profits for speculative investors."

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:

Persons submitting written comments for the printed record of the hearing should submit six (6) copies by the close of business, Friday, May 26, 1989, to Robert J. Leonard, Chief Counsel, Committee on Ways and Means, U.S. House of Representatives, Room 1102 Longworth House Office Building, Washington, D.C. 20515.

SEE FORMATTING REQUIREMENTS BELOW:

Each statement presented for printing to the Committee by a witness, any written statement or exhibit submitted for the printed record or any written comments in response to a request for written comments must conform to the guidelines listed below. Any statement or exhibit not in compliance with these guidelines will not be printed, but will be maintained in the Committee files for review and use by the Committee.

1. All statements and any accompanying exhibits for printing must be typed in single space on legal-size paper and may not exceed a total of 10 pages.

2. Copies of whole documents submitted as exhibit material will not be accepted for printing. Instead, exhibit material should be referenced and quoted or paraphrased. All exhibit material not meeting these specifications will be maintained in the Committee files for review and use by the Committee.

3. Statements must contain the name and capacity in which the witness will appear or, for written comments, the name and capacity of the person submitting the statement, as well as any clients or persons, or any organization for whom the witness appears or for whom the statement is submitted.

4. A supplemental sheet must accompany each statement listing the name, full address. a telephone number where the witness or the designated representative may be reached and a topical outline or summary of the comments and recommendations in the full statement. This supplemental sheet will not be included in the printed record.

The above restrictions and limitations apply only to material being submitted for printing. Statements and exhibits or supplementary material submitted solely for distribution to the Members, the press and public during the course of a public hearing. may be submitted in other forms.

Chairman PICKLE. The subcommittee will come to order. And we ask our guests to please take a seat.

Today, the Subcommittee on Oversight will examine the use of pension assets in leveraged buyouts and related transactions. It is important that the Congress and the public recognize that pension plans are major participants in every aspect of leveraged buyout transactions.

Pension plans as investors must find a productive way to use the nearly $1.2 trillion which workers and employers have set aside in their pension trust funds. One increasingly popular investment has been in leveraged buyout pools. It is these buyout pools which have so dramatically instigated the massive corporate takeovers we have all witnessed over the past few years. Another investment which has been made in ever-increasing volume is "junk" bonds. While less than 2 percent of all pension assets are devoted to these LBO investments, pension plans are, nonetheless, a significant source of financing for leveraged buyout transactions. We must ask ourselves, is this the right place to invest our Nation's retirement savings?

In addition, pension plans and their beneficiaries can be seriously affected when companies go through an LBO. The GAO has found that about 40 percent of the companies that sponsor pension plans terminate one or more of those plans when the company goes through an LBO. Since 1982, well over 100 pension plans have been terminated following an LBO of the plans' sponsors, and hundreds of millions of dollars have been taken out of these pension trusts and given back to the corporate sponsor. Here again, we must ask ourselves, is this a wise use of the Nation's retirement savings?

Finally, pension plans are beginning to raise their voices in shareholders' meetings all across the country. As major investors in corporate equities, private pension plans now own 18 percent of all the stock in U.S. corporations. The percentage is much higher in many of our Nation's "blue chip" companies. And with these holdings, pension funds have now become the true owners of America's corporate wealth. By the year 2000, pension plans will own 40 percent of all U.S. corporate equities. With the ownership of these shares comes the power to vote on a wide variety of shareholder issues. Increasingly, pension funds will be the deciding factor in the critical issues of corporate governance. In this role, they will play a critical part in determining the course of our national economy.

These are issues that cannot be ignored. From Main Street to Wall Street, from the White House to the courthouse, every citizen in every walk of life is directly affected today, tomorrow, and for the rest of our lives.

This morning, I am pleased to recognize the many distinguished witnesses who will be helping the subcommittee in its work.

Now, the Chair recognizes Mr. Schulze for any opening remarks he may have.

Mr. SCHULZE. Thank you.

I am pleased to join you in opening our hearing on the role of pension assets in LBO's. Earlier this year the full committee held hearings on the broad subject of LBO's. It considered the role of LBO's in our economy, and the role of the tax law in LBO's.

The LBO issue has many dimensions and many implications. Our vocabulary and discussions today will resemble what the full committee did a few months ago. But our emphasis will be different. We will focus on the effect of LBO's on pension plans.

For us, the spotlight will be on pension plans, whereas the full committee's spotlight has been on the LBO. I am anxious to learn the experience of pension plans which have invested in LBO's. Has the investment performance of pension plan portfolios been damaged by investing in high-yield junk bonds or trading in the security of LBO targets?

What are the fiduciary rules which govern the duty of a pension manager to accept the premium price of a tender offer? We also should evaluate the interplay between LBO's and overfunded defined benefit pension plans.

There have been allegations that the excess assets of overfunded plans make the company an attractive takeover target. This potentially could affect the employee in several ways.

First, the acquiring company might terminate the overfunded plan after the merger in order to recoup part of the takeover costs. Second, a company on its own initiative might terminate an overfunded pension plan as a way to diffuse a possible takeover bid.

The subcommittee should examine how much credibility there is to the allegation that LBO's result in more terminations of overfunded pension plans. But that question should not end our inquiry.

What has been the fate of employees in terminated plans? Do the acquiring companies establish new pension plans for employees, and how do the benefits in the new plans compare to the old pension plans?

The full committee will debate the policy question of whether LBO's are desirable or whether they should be restricted. Our focus is on whether or not LBO's are good for pension plans. If the full committee decides to limit LBO activity, then our subcommittee could help to shape the package.

Mr. Chairman, I look forward to hearing today's witnesses.

Chairman PICKLE. Do any of the other members have a statement?

Mr. McGrath.

Mr. McGRATH. I appreciate your effort to assist the full committee by developing specific issues surrounding leveraged buyouts. Our topic today is extremely important to millions of Americans who depend upon pension plans for their retirement income.

As an insurer, the Federal Government also has a significant interest in the investment decisions and operations. After reviewing the materials and testimony we have received thus far, I am encouraged by the fact that pension fiduciaries appear to be appropriately cautious in making investments in LBO transactions.

The proportion in LBO's represents only a tiny fraction of the overall investments held by private pension plans. I believe, frankly, that only 1 percent of the pension assets of $2 trillion is invested in junk bonds, which are the major debt instruments in financing LBO's.

I know that good news does not often make headlines, but I hope that the record will show that in the majority of cases, pension

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