Whenever the U.S. Pension Benefit Guaranty Corporation, the ultimate insurer of participant benefits under U.S. pension plans, re-evaluates the vast scope of its risk exposure, you can be sure that private employers will be subject to increased responsibilities and monitoring. This time, the increased obligation is a proposed new reporting requirement that may turn out to have an impact on every-day, run of the mill business transactions even for employers with well-funded pensions.
Under current rules, plan sponsors are required to notify the PBGC within 30 days of events that are deemed to increase the PBGC’s risk of having to take over an underfunded defined benefit plan. Every transaction that results in a change in the composition of the sponsor’s worldwide controlled group of businesses and every transaction in which defined benefit plan assets are transferred from one controlled group to another involves a potential reportable event, unless a waiver applies, but there are many existing waivers and extensions.
The PBGC proposed towards the end of 2009 to eliminate most waivers and extensions for reportable event filings under Section 4043 of the Employee Retirement Income Security Act of 1974 (ERISA). Under the new proposal (PDF), waivers would be eliminated even for sponsors of well-funded plans that would not increase the PBGC’s risk and for transactions involving foreign entities.
These waivers often eliminate the need to file in corporate transactions such as a sale of a subsidiary, when there are no underfunded pension plans associated with the deal. If an actual filing is required, a significant filing extension has often been available under current rules. However, under the PBGC’s proposal, the majority of corporate transactions would actually require a filing no later than 30 days after the event. The penalty for not filing on time may reach $1100 per day.
If the proposal is adopted, it would not only require extra reports to the PBGC, but the traditional documentation surrounding borrowing and other corporate transactions will need to change.
Many current corporate loan documents have incorporated the PBGC’s current reportable event and waiver rules as a way to indicate whether a borrower is in financial difficulty. Commonly, borrowers represent that no reportable event “for which the reporting requirement has not been waived” or “for which a filing is required” has occurred as a condition of drawing down funds under the loan, and the occurrence of such a reportable event may even be an event of default under the agreements. The new PBGC rules could have unintended negative consequences, such as loan acceleration, under these agreements. Purchase agreements typically also require such representations.
Plan sponsors and counsel working on these transactions need to monitor the status of this proposal and the effective date of any changes to ensure timely compliance with the new rules. Lenders and creditors will need to assess the impact on existing and new loan agreements.