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Investment Funds On Hook For US Pension Liabilities

Case may widen funds’ exposure to liability

Pension fund deficits

Funding shortfalls have been growing in recent years for reasons including greater longevity and lower interest rates. Most pension funds do not have any hedges against rising life expectancy. Meanwhile, lower interest rates and tighter corporate credit spreads reduce the discount rate at which pension liabilities are calculated.

Additionally, many companies and pension fund sponsors around the world, including private equity firms, have been closing pension funds to new members, seeking to reduce benefits, and have ceased funding. Investors in distressed companies may have a particularly strong need to reduce costs in order to turn around firms and ensure they can survive post-bankruptcy, or possibly avoid going bankrupt in the first place. Defined benefit pensions, open to new members, are almost extinct outside the public sector.

But some recent US legal rulings are moving in the opposite direction of market and economic forces. Owners of US companies – including some private equity funds – could become more frequently liable for making extra contributions to remedy pension fund deficits, after a legal judgment in response to a case brought by a trade union. Sun Capital Partners was found liable for pension liabilities at bankrupt Scott Brass Inc. (Sun Capital Partners III, LP, Sun Capital Partners III QP, LP, and Sun Capital Partners IV, LP, v. New England Teamsters and Trucking Industry Pension Fund in 2013). This was despite Sun Capital following widely used structuring techniques to avoid liability.

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