Hon. Robert P. Casey Jr.
393 Russell Senate Office Building
Washington, DC 20510
Dear Senator Casey:
Americans for Financial Reform (AFR) – a coalition of more than 250 consumer, employee, investor, community, labor and civil rights groups — wishes to respectfully express our strong concern regarding a carve-out from derivatives reform that we understand you are considering for ERISA defined benefit pension plans.
We appreciate having had a brief opportunity to talk with your staff and we share your concern that many private sector defined benefit pension assets (DB plans) have experienced significant investment losses. We would welcome the chance to continue with you a longer and broader discussion about financial reform – and derivatives reform specifically – as it affects the trillions of dollars standing behind the retirement hopes of tens of millions of American workers and their families.
But we believe strongly that derivatives reform is part of protecting those assets and promises. And DB plans have even more reason than other investors to value that protection.
DB plans are set up to allow employers who sponsor them to contribute steadily over time. They offer retirees and their spouses’ retirement income over their lifetimes. They can hold tens of billions in plan assets and owe much, much more in terms of promised benefits and liabilities. These plans invest in derivatives contracts and other alternative investments. Much has been written about the use of these investments to hedge long-term liabilities, to seek significant investment gains, or as part of accounting techniques.
To some degree, taxpayers already are standing behind DB plans that use what Warren Buffett called “financial weapons of mass destruction”. The Pension Benefit Guaranty Corporation (PBGC) stands behind DB promises and steps in when those promises can’t be kept. So the PBGC and the other companies that pay premiums to insure their plans through the PBGC have a stake in DB assets being solid and well-protected. Workers and retirees expecting DB benefits have a stake in this, too – when PBGC is forced to take over an underfunded plan, most retirees take a significant haircut in the pension they had otherwise been promised. And PBGC has some authority to borrow from Treasury if its own assets run out. So taxpayer interest in this issue is real.
We’re told some are asserting that DB plans aren’t villains and shouldn’t be penalized by the same reforms that are proposed for big banks; that DB plans invest for the long-term and don’t speculate or move markets and so should be carved-out; that it would be difficult to know whether margin calls and capital requirements could be paid from DB plan assets rather than employers’ resources; and that over-the-counter derivatives regulation could interfere with the prudent investment that is required of ERISA fiduciaries.
Our goal is certainly not penalizing DB plans or sponsors. On the contrary, we believe it is very important to distinguish between the plans, the pools of assets that back up retirement promises, and the products and services being sold to the plans – or to the employers funding the plans. If capital standards, margin requirements, clearing and more is what other investors will receive to ensure a transparent market at comparable prices with reliable counterparties, why would DB plan assets deserve less protection? Is it really being asserted that DB assets should forgo OTC reform protection in order to avoid some increased cost to the plan or employers? That seems hard to reconcile with the spirit of the guidance on derivatives that the Labor Department’s ERISA agency shared with the OCC in 1996.
In part, the Assistant Secretary of Labor said: “While derivatives may be a useful tool for managing a variety of risks and for broadening investment alternatives in a plan’s portfolio, investments in certain derivatives, such as structured notes and collateralized mortgage obligations, may require a higher degree of sophistication and understanding on the part of plan fiduciaries than other investments. Characteristics of such derivatives may include extreme price volatility, a high degree of leverage, limited testing by markets, and difficulty of determining the market value of the derivative due to illiquid market conditions.”
She also cautioned “Investments in derivatives are subject to the fiduciary responsibility rules in the same manner as are any other plan investments. Thus, plan fiduciaries must determine that an investment in derivatives is, among other things, prudent and made solely in the interest of the plan’s participants and beneficiaries.” It seems difficult to reconcile these words with a request for a minimum two-year pass.
Senator, you are certainly correct in noting that the intersection of ERISA rights and duties with the major financial reform underway is hugely complicated – and hugely important to get right. We’d like to make this suggestion: direct the CFTC to pursue regulations regarding derivatives and pension investments through a negotiated rulemaking procedure that would include representatives of pension participants in its deliberations; include also the Department of Labor’s ERISA Agency and the Pension Benefit Guaranty Corporation; and direct that regulations include a cost-benefit analysis considering the impact of proposals on DB plans, fiduciaries’ obligations, funding risks, and PBGC liabilities.
We’d also welcome a chance to explore additional concerns that a pension carve-out might raise, for example, for implications it might have for ERISA rights and remedies.
If you have any questions, please do not hesitate to contact Lisa Lindsley, AFSCME at 202-425-1975.
Sincerely,
Americans for Financial Reform
CC:
Secretary Timothy Geithner, Department of Treasury
Chairman Gary Gensler, Commodity Futures Trading Commission
Secretary Hilda Solis, Department of Labor
Assistant Secretary Phyllis Borzi, Department of Labor, EBSA
Acting Executive Director Victor Snowbarger, Pension Benefit Guaranty Corporation