How private equity cheats pensions at workers’ expense – Spoiler: It’s all about public policy

Source: David Cay Johnston, Al Jazeera America, July 9, 2015

It’s time for American workers to understand the game of private equity, because it’s being played at their expense, thanks to rules put in place by Congress.

Here’s how the game currently works: Workers sell their jobs, pensions and futures, for little to nothing in return. The buyers are those masters of unproductive capital acquisition, private-equity funds.

Their game is short term. Companies are acquired with lots of borrowed money. (Congress incentivizes this by making interest a tax-deductible business expense.) Some of the borrowed money is almost immediately used to repay the general partner and some other investors so they end up with a cost-free stake. If your equity stake costs less than zero, your returns are infinite.

The remaining equity in such deals comes primarily from pension funds — that is, from workers….

…Much of the pension money in private equity comes from public employee pension funds, the ones that politicians in many states have been failing to fund, resulting in not enough assets to pay benefits that the workers earned.

These shortfalls put pressure on pension fund managers to find ways to earn higher rates of return, which of course means taking on more risk. One way to reduce such risk is to get rid of private-sector pension plans because that lowers costs to the owners, though at a huge and delayed cost to private-sector workers. It also adds to the risks of future state welfare costs for destitute older people….