A Bad Man's Guide to Private Equity and Pensions

32 Pages Posted: 19 Jun 2015 Last revised: 23 Jun 2015

See all articles by Elizabeth Lewis

Elizabeth Lewis

Harvard University - Edmond J. Safra Center for Ethics

Date Written: June 19, 2015


Modern corporate bankruptcy law has been shaped, and some of it written, by special interests. Even so, the law is rooted in American ideals of renewal, and of viewing failure in the marketplace as a sign of effort and gumption, not moral collapse. It’s a powerful idea - shedding the past to begin anew. But for decades, Chapter 11 of the U.S. Bankruptcy Code has also been used strategically - to destroy union contracts, edge out competitors, and limit product liability lawsuits.

More recently, some private equity firms have honed Chapter 11 as an efficient financial engineering tool for insider sales - and for dumping pensions. Based on partial data from the Pension Benefit Guaranty Corp., at least 51 companies have abandoned pension plans in bankruptcy at the behest of private equity firms since 2001. They’ve dumped $1.592 billion in pension bills onto a government-backed agency that insures private defined benefit plans. Because pension insurance doesn’t cover all benefits, their actions have left some of the nearly 102,000 workers or retirees with lost benefits amounting to at least $128 million. And they've contributed to the chronic deficits at the Pension Benefit Guaranty Corporation.

Other types of businesses, including publicly held companies, have also abandoned pension plans in bankruptcy. But the business model and practices of some private equity firms can make pension-dumping in bankruptcy especially attractive.

The legal and regulatory environments in the U.S. combine with those practices to add up to a form of institutional corruption. In this working paper, I explain how Oliver Wendell Holmes’ hypothetical “bad man” can use bankruptcy as a strategy to profit. So, here is a bad man’s guide to ditching pensions in bankruptcy - legally.

Keywords: Institutional corruption, bankruptcy, private equity, defined benefit plans, pensions

Suggested Citation

Lewis, Elizabeth, A Bad Man's Guide to Private Equity and Pensions (June 19, 2015). Edmond J. Safra Working Papers, No. 68, Available at SSRN: https://ssrn.com/abstract=2620320 or http://dx.doi.org/10.2139/ssrn.2620320

Elizabeth Lewis (Contact Author)

Harvard University - Edmond J. Safra Center for Ethics ( email )

124 Mount Auburn Street
Suite 520N
Cambridge, MA 02138
United States

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