Slowly, we are beginning to see increased attention questioning whether pension risk transfer (“PRT”) deals are in the best interests of retirees. On October 7, 2022, Life Annuity Specialist published an article asking this very question: “Why the Boom in Pension Transfers to Insurers Has Some Worried”.
There are several different issues which should raise eyebrows for retirees. Warren S. Hersch writes that:
“[c]oncerns have arisen about the group annuity contracts that insurers sell to fund companies’ defined benefit plans. They range from how plan fiduciaries evaluate an annuity to what guarantees ensure future income payments to retirees will continue if the issuing insurer should go belly up.”
Hersch interviewed various individuals and organizations to gain some insight into these concerns. One problem is a lack of transparency associated with PRT deals.
“’The biggest problem is that there’s no transparency at all in this market’ said Marty Leary, the director of research at UniteHere!…..’It’s a black box.’… The pension transfer deals often seem to proceed, Leary added, without a competitive bidding process and without key disclosures, such as about potential conflicts of interest.”
Another worry is a lack of legally binding guidance for choosing an appropriate annuity provider so that retirees’ interests are not prejudiced in PRT deals.
“[UniteHere!] also criticizes a 1995 Department of Labor interpretive bulletin that calls for plan fiduciaries to choose the safest available annuity issuer, unless the interests of participants and their beneficiaries would be better served to do otherwise”
Our own Executive Director, Edward Stone commented on this in the article:
“[R]evised guidance should also require that insurers maintain capital and surplus levels needed to support obligations to annuitants, and that they use separate accounts managed solely for the benefit of the recipients.”
A further concern raised in Hersch’s piece is with assessment of the underlying assets supporting group annuities. “There’s a patchwork of statutory accounting procedures and state-prescribed practices of the National Association of Insurance Commissioners (quoting Birny Birnbaum of the Centre for Economic Justice). In contrast, the American Council of Life Insurers said that “the regulation of annuity insurers is comprehensive and effective.”
Our Executive Director raised one of the most important issues for retirees when a PRT transaction occurs: the lack of equivalence between (1) Pension Benefit Guaranty Corporation (“PBGC”) protection in the event a defined benefit pension plan becomes insolvent and (2) State Guaranty Association coverage if a group annuity becomes insolvent or impaired. When a PRT deal occurs, retirees lose (1) and gain (2) – ultimately, a far less valuable backstop.
“‘[T]he PBGC isn’t imperfect, but to say that a state guaranty association’s safety net offers reasonably equivalent coverage is just a lie,’ he said. ‘I don’t know how else to put it’”.
To emphasize the disparity between PBGC coverage and state guaranty association protection, Stone provided an illustration to Hersch showing that monthly payments of $2,500 for a 65-year-old retiree will be exhausted four months after reaching age 73 under guaranty association coverage that’s capped at $250,000. In contrast, the payments under Pension Benefit Guaranty coverage would continue and keep rising. The illustration assumes the insurer goes into liquidation and that the PBGC takes over responsibility for the payments on the same date the retiree attains age 65.
We hope discussions around possible PRT pitfalls, like this one raised by Warren S. Hersch, will continue going forward, garnering the attention of the folks in Washington and state legislatures across America who can put into law the protections Retirees so desperately need.