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LOS ANGELES-Lawyers at some of the nation’s largest law firms expect a sharp rise in legal work following the recent passage of a pension reform law that makes broad changes to employee retirement programs. Specifically, lawyers in tax, trusts and estates and employee benefits anticipate that the law, called the Pension Protection Act of 2006, could bring more legal work from employers looking to overhaul the retirement plans they offer to employees. The law also opens up opportunities for private investment funds to receive more money from certain types of pension plans. Lawyers say those changes could bring more investment deals, which would require more legal work. “This is one of the most far-reaching pension and benefit measures to be enacted in quite a while in terms of the changes it makes,” said David West, an employee benefits partner in the Los Angeles office of Gibson, Dunn & Crutcher. “There are a number of things and changes we’ll be making over time. It’ll keep us busy.” President Bush signed the Pension Protection Act on Aug. 17 as a new law designed to protect workers from underfunded pensions that crippled their retirement savings. At its core, the act requires employers to maintain certain funding levels on their defined-benefit pension plans, which are traditional pension plans in which an employee receives a certain amount of retirement funding from an employer. The act also makes changes to cash-balance plans, which are increasingly popular alternatives to traditional pension plans. In a cash-balance plan, an employer makes annual contributions to a retirement account held by each employee, who then collects the sum when he or she retires. In a traditional pension plan, the employer also contributes funds, but the amount the employee receives on retirement is a set rate determined by salary and longevity. A recent example are the cash-balance plans provided by International Business Machines Corp., which won a court victory on Aug. 7, when the 7th U.S. Circuit Court of Appeals ruled that IBM’s plans were not discriminatory against older workers under the Employee Retirement Income Security Act (ERISA). Cooper v. IBM Personal Pension Plan, No. 05-3588 (7th Cir.). The 7th Circuit found that IBM’s plan does not discriminate against older employees because its funds are accrued equally among employees of all ages. Older employees tend to favor traditional plans because they are based on an employee’s tenure and salary in the last years of employment. ‘Real thought projects’ As a result, lawyers at some of the biggest firms, such as Gibson, Dunn & Crutcher; Morrison & Foerster; White & Case; and Kirkland & Ellis, anticipate their workloads will increase. Some estimate that the work could continue for the next several months and possibly for years. Vicki Hood, a partner in charge of the employee benefits practice group at Chicago-based Kirkland & Ellis, said that since the act was passed, all her clients have either called her or asked her to speak to their administrative committees and executive officers about how the changes would affect them. “It’s more than just revising the plans and amending them and shooting those amendments through without any thought process, which is what we do many times when the laws change,” she said. “People at my level-I’ve been doing this for 25 years-will be working closely with companies on real thought projects: How do I want to structure my benefits practice?” Among the changes: Companies are allowed to automatically enroll their employees into savings plans such as 401(k)s. In the past, employers feared they would be held liable for such actions under state wage laws. Also, employers are permitted to offer investment advisers who could provide professional advice to their 401(k) participants. Lawyers expect to see an uptick of work in both areas, said Lawrence Hass, a partner in the New York office of Paul, Hastings, Janofsky & Walker. “These are all new requirements with a lot of interpreting that has to be done and advising and a fair amount of legal work,” he said. A large bulk of the act makes significant changes to traditional defined-benefit pension plans and cash-balance plans. In the past, cash-balance plans faced potential liabilities because courts were divided on whether those plans subjected employers to age discrimination claims. The act clarifies those ambiguities, which employee-benefits lawyers said could lead many clients to convert their traditional pension plans to cash-balance plans. “Employers have switched to cash-balance plans because they’re easier to understand for participants but also because it could save the company money,” said Paul Borden, head of Morrison & Foerster’s employee benefits group from its San Francisco office. The act also generates more work for lawyers representing nonprofit and charitable organizations. One of the new rules requires tax-exempt organizations with annual gross revenues of less than $25,000 to file a notice with the Internal Revenue Service. Another set of rules impose a myriad of restrictions and requirements on the use of donor-advised funds, one of the biggest growth areas among charities, said LaVerne Woods, chairwoman of the tax exempt organizations practice group at Seattle-based Davis Wright Tremaine. “These are funds that involve a donor making a contribution and then retaining a right to provide advice to the charity on how the funds will be used,” said Woods, who also is chair of the American Bar Association’s exempt organizations committee in the Section of Taxation. “These are significant changes for organizations that offer donor-advised funds.” More deals coming One of the most talked-about parts of the act among lawyers is a change that would allow private equity and hedge funds to obtain more investment dollars from pension plans. Large pension funds, such as the California Public Employees’ Retirement System (CalPERS), invest not only in the stock market but also in real estate and private equity firms, such as venture capital. Borden said that he expects lawyers to be “very busy” as more deals come out of the so-called “plan assets” changes. “Pension money is very attractive to investment managers because [pensions] have a huge amount of money in them,” Borden said. “They’re enormous sources of capital. But investment funds had to go through so many hoops, they had to avoid it. Now, getting pension money will be a lot more possible, so there will be a lot more deals.” Before the act, a private equity firm or hedge fund would be able to receive money from pension plans, but only if the amount totaled 25% or less of its overall investment pool. Private equity firms or hedge funds that raised more than 25% of their funds from pension plans would automatically fall under the stricter fiduciary rules of ERISA, which governs employee benefits plans in most cases. The funds wanted to avoid ERISA rules, which involve more regulations. Under the act, private equity firms and hedge funds now are allowed to raise more than 25% of their investment dollars from government and foreign pension plans without having to comply with ERISA rules. Meanwhile, they can continue to raise money from private pension plans as long as those dollars do not exceed 25% of their investment pools. For lawyers, the changes mean more investment deals between pension plans and private equity firms and hedge funds. “We’re going to be helping clients restructure, changing their offering documents and educating them as to what this is about,” said Kenneth Raskin, head of the executive compensation, benefits and employment law practice group at White & Case. “Now, they can get more money from private pension plans, which is more money to invest. If they have more money to invest, then we do the deals.” Drafting disclosures Among other things, lawyers must draft new disclosures of securities offerings, he said. Jacob Friedman, chairman of the tax department at New York-based Proskauer Rose, said that when a pension fund invests in a private equity fund, lawyers must review, comment and negotiate over the documents, such as subscription agreements and compliance with ERISA. But some lawyers who deal in ERISA compliance disagree that changes to the 25% rule would generate more work, since they would reduce the amount of regulatory hurdles needed on such transactions. In the past, private equity funds and real estate funds could avoid the 25% rule by restructuring as a venture capital operating company or a real estate operating company, designations that are restrictive but exempted from ERISA obligations. With the act’s changes, some ERISA lawyers said that fewer private equity firms would need them to structure those exemptions. “That’s an area that will probably slow down in our practice and other law firms that do that,” Hass said. Michael Segal, co-chairman of the employee benefits and executive compensation practice at New York-based Paul, Weiss, Rifkind, Wharton & Garrison, agreed that the 25% rule could decrease some work for ERISA lawyers, but noted that “there’s still a significant amount of complexity involved.” For one thing, many clients might be unclear as to whether they have complied with the rule. He said lawyers must look at every class of equity the fund issues in order to determine whether the 25% test has been met. “It’s not entirely clear what constitutes a class, so lot of lawyers will be burning a lot of brain cells to figure out whether different classes have different fee structures,” Segal said.

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