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PBGC Blog: Retirement Matters

Brown gavel sitting on a wood blockThings looked bleak last year for plan funding when a U.S. District Court in Massachusetts said private equity firms didn't operate as trades or businesses, but passive investors in the companies they own. If the ruling was left intact, it would have created a major loophole in this kind of liability for private equity funds connected to pension plans.

At the time, the court considered whether two funds managed by private equity firm Sun Capital were responsible for $4.5 million in withdrawal liability after their company, Scott Brass, a Rhode Island-based metal fabricator, left the New England Teamsters multiemployer plan.

Such distinctions are important because entities engaged in a trade or businesses may be responsible for pension shortfalls in single employer plans and for withdrawal liability in multiemployer plans.

Earlier this year, the Teamsters asked the First Circuit Court of Appeals to revisit the issue and PBGC filed a friend of the court brief supporting their cause.

The appeals court reversed the district court's ruling in part noting that the Sun Capital funds weren't merely passive investors.

"Private equity funds differ from mutual funds and hedge funds because they 'assist and manage the business of the companies they invest in,'" the decision said. "As one commentator puts it, 'It's one thing to manage one's investments in business. It's another to manage the businesses in which one invests.'"

PBGC's General Counsel Judith Starr praised the ruling saying it helps the agency protect the benefits of all plans connected to these firms. "Without it, they could walk away from benefit obligations leaving plans in poor financial shape," she said.

But more legal drama awaits. The latest ruling didn't settle whether the funds will have to pay up.

The appeals court said the fund with 70 percent ownership in Scott Brass is a trade or business, but told the district court to decide whether the second fund, with a minority stake, should get the same designation, and if either fund shared common control with Scott Brass.

The district court is expected to take up the issue over the coming months.

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