Addressing Prior Pension Obligations
Pensions and Labor Restructuring
Pensions: Implementation Steps
This section outlines key implementation steps for pensions in PPI. There are three main steps:
The data room is a managed facility provided during the PPI transaction for bidders to examine supplementary, bulky, or detailed information. Bidding documents or the data room should provide information on:
Large-scale early retirement programs can present a challenge for pension plan administrators. First, finance must be found to meet any gaps in the plan funds. Potential sources of finance are essentially similar to those outlined in module 1 of the Toolkit. Second, the administrative capacity to process the applications or to manage a new pension scheme must be considered. For example:
Together with the specialist consultant, the implementing agency will need to take the following actions:
Throughout the pension process the implementing agency will benefit from the recruitment of independent pension or actuarial advice for three reasons:
Box 5.17 gives one illustration of how actuarial advisers need to work with the infrastructure enterprise, pension plan trustees, and the implementing agency. The CD-ROM that accompanies this Toolkit provides outline terms of reference for the engagement of a specialist consultant for a specific PPI transaction. It also offers a job description and draft advertisement for the position of long-term pension adviser who might support a PPI office through a number of PPI transactions.
Terms of reference
Job description for a long-term pension adviser.
Description of the Pension Problems
In one South American country, employees in two mining companies and the mines holding company contributed to one pension plan. The privatization strategy was to offer the mines separately and close the holding company, and an early question was whether there needed to be separate pension plans. The pension scheme actuaries advised that there were cost benefits to continuing with one shared pension plan, including lower actuarial, audit, and trustee fees, although they recognized that company control of pension plans was important and any crosssubsidization was undesirable. Cross-subsidization could arise not only through one firm having problems with pension contributions but also with differing age and gender profiles and with different earnings levels and retirement ages between the two companies.
Significant practical problems emerged in trying to assess the pension plan's assets and liabilities. One of the fund's major investment assets, a property investment, would be difficult to sell. Moreover, the pension trustees had not perfected title to this property. When actuarial advisers looked at liabilities, they found that they could not value the current pension liability because the company had failed to provide the data on employees necessary to carry out the valuation. Moreover, the previous valuation six years earlier recorded a significant liability, and the mine companies' actuaries had then recommended an increase in pension contributions, which the companies had not implemented. According to the pension plan, this represented a liability of the company although it was not recorded as such in the company's accounts. In addition to these two liabilities, the increasingly poor financial position of the mines had resulted in their inability to pay pension payroll contributions to the pension administrators, which represented a further liability.
The unions wanted employees to be paid full redundancy payments before privatization, but also wanted all pension rights transferred and not liquidated. The pension plan rules, however, indicated that only the trustees could make this decision–not unions or the government–and that employees also had the choice of opting out.
Inflation had eroded the value of many pensions, which had been reasonable when first awarded, and many pensioners were now below the national poverty line. Fear of criticism arising from such payments might deter an international investor from taking over the pension program.
How the Problems Were Resolved
Earlier privatizations in the country had tackled pensions through pension scheme liquidation or negotiated handover (such as the transfer of an existing plan to an insurance company) that occurred at the same time the new investors created a new pension plan. Under liquidation, existing pensioners received an annuity, whereas others received lump-sum payouts calculated by the actuaries or deferred pensions. For the mining companies, however, the problems of selling a major asset–the commercial property–made liquidation an unattractive option.
On the advice of the actuaries, the government chose not to create three separate pension plans but to establish a notional separation that removed any cross-subsidization while enabling the plan to continue owning assets in common. The title of the pension scheme to the commercial property was undisputed and government– working with trustees–took steps to perfect the title.
The actuaries advised that the existing pension provisions, particularly for those on very low pensions, could be ring-fenced and responsibility for payment transferred to an insurance company, although this would result in workers losing medical benefits that were then being paid by the company.
The government engaged additional financial and accounting help to identify missing personnel data required by the actuaries, who then updated the valuation. In its information memorandum for investors the government stated that both the backlog of payments to the pension scheme and the increases recommended by the actuaries were company liabilities that investors were to take on, but that any actuarial deficit (that is, the uncertain financial liabilities) would be settled by government through future contributions or settled with the investor at the time of payment.
The government made available the services of the pension scheme actuary to prospective bidders who required clarification on pension liabilities during the bidding period.
Source: Adam Smith Institute, personal communication.