Pension Plans and Leveraged Buy-Outs

T-HRD-89-20: Published: Apr 27, 1989. Publicly Released: Apr 27, 1989.

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GAO discussed its work on the role of pension plans in leveraged buy-outs (LBO), focusing on the: (1) incidence of pension plan terminations by companies taken over in LBO; (2) extent of pension plan investments in LBO; and (3) risks of investing pension plan assets in LBO. GAO found that: (1) 40 percent of the companies it reviewed terminated pension plans with a total of about $1.8 billion in assets; (2) 23 of 107 terminations occurred before LBO, an indication that the sponsor terminated the plan to make the firm a less attractive LBO target, and the remainder of the terminations occurred after LBO, with the acquiring firm obtaining any plan assets exceeding those necessary to pay plan benefits; (3) most terminated plans had excess assets; (4) sponsors obtained a reversion of excess assets of about $581 million; (5) sponsors of 40 percent of the terminated plans stated that they intended to cover plan participants under some other plan, and GAO could not determine whether the remaining sponsors intended to cover participants in terminated plans; (6) sponsors it contacted had invested about 3.7 percent of their combined assets in LBO funds; and (7) LBO fund investments involve several different risks, including limited liquidity, inability to trade a partnership interest as a negotiable security, and the chance that an economic downturn could hamper the acquired company's ability to pay off LBO debt.

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