Pension De-Risking and What It Means for Retirees: A Primer
- Pension contributions move plans closer to full-funding needed for annuity buyouts
- Retirees say buyouts transfer risks to them via loss of ERISA and PBGC protections
Several large companies, including Lockheed Martin and 3M, made big contributions to their pension plans in the first month of 2018.
Several large companies, including Lockheed Martin and 3M, made big contributions to their pension plans in the first month of 2018.
As the companies have increased their contributions, they’ve also moved the plans closer to being fully funded. The closer the plans get to being fully funded, the easier it could be for the companies to unload their pension liabilities through “de-risking.”
Pension de-risking can take different shapes. One is when an employer buys a group annuity contract, typically from insurance giants like Prudential Life, Metropolitan Life Insurance Co., Massachusetts Life Insurance Co., and Principal Financial. This type of de-risking has been on the rise for several years and is expected to be at record levels in 2018. The LIMRA Secure Retirement Institute estimates that employers in 2018 will spend $20 billion to purchase group annuity contracts from insurers.
For employers, de-risking a pension plan can make sense from a business standpoint. By purchasing an annuity to cover the cost of retirees’ benefits, the employer no longer bears the investment and interest rate risk it has when managing its pension plan.
But these transactions that shift risk from employers to insurers often move some of the risk to retirees as well, sources told Bloomberg Law.
“If the insurers holding these annuities sustain a period of poor investments and people live longer than expected–even companies that are today financially well-off could find themselves in trouble down the road and there’s a question whether states offer adequate safeguards,” Greenwich, Conn.-based attorney Edward S. Stone told Bloomberg Law. Stone specializes in helping retirees deal with pension risk transfers and is counsel to the Association of BellTel Retirees, a group advocating for retirees from Verizon and its predecessor companies.
PBGC Protections Superior?
One of the primary results of an employer de-risking its pension plan is that the plan is removed from the protections of the federal Pension Benefit Guaranty Corporation. The annuities that are paid out to retirees aren’t insured by the PBGC, and instead it’s up to each state’s guaranty association to protect the annuities. The amount of protection varies from state to state, but it must be at least $250,000 over a retiree’s lifetime.
So if a major insurer would happen to collapse, the state guaranty associations are there to pick up the tab. And the amount of assets that the state guaranty associations protect is substantially smaller than that protected by the PBGC.
For example, if covered by the PBGC, a 65-year-old employee is entitled to a maximum payment of up to $5,420 per month for a straight-life annuity, which is based solely on an employee’s life expectancy with no survivor benefit option. The typical state guaranty association, however, provides a much lower guarantee–typically a $250,000 per individual lifetime limit, which would still be the maximum recoverable for all combined annuities and life insurance policies an individual holds at an insolvent insurer. Several states, including New York, Connecticut, Washington, and New Jersey, have limits of up to $500,000.
The $250,000 limit, if converted to a straight-life annuity for a 65-year-old man, would be $1,992 per month, less than half of the PBGC guarantee. The same annuity capped at $500,000 would convert to a $2,570 per month annuity. Retirees who move to a state with a lower cap will see their protections reduced.
State Protections Exceed SGAs
But those numbers may not be telling the whole story about the protection available to retirees under the state structure, Peter Gallanis, president of the National Organization of Life and Health Insurance Guaranty Associations, told Bloomberg Law Feb. 1. NOLHIGA is a voluntary association made up of the life and health insurance guaranty associations in each state and the District of Columbia.
When an insurer becomes insolvent, it often retains most of its assets. Annuity certificate holders would have a priority claim as a creditor to an insurer’s assets that a state puts into receivership. Only after that money is exhausted would the SGAs need to satisfy any remaining obligations owed to retirees, he said.
A report by NOLHIGA in 2016 said that employee annuity payments are well-secured and may even be better protected after being transferred to an insurer. The report points out that the guaranty associations are only a last resort for the rare occasions they may be needed, the companies taking on the risks are among the strongest in the industry, and they are under the regular auspices of state insurance regulators.
The SGA’s ability to ante up sufficient funds if an economic or investment downturn cripples the life insurance industry as a whole is questionable, given the fact that all the funds come from the insurers themselves, Stone said. Although bad times could also prevent the PBGC from meeting its guarantees, Stone said he has more confidence that Congress won’t let millions of retirees lose most of their benefits.
https://bnanews.bna.com/employee-benefits/pension-de-risking-and-what-it-means-for-retirees-a-primer
Apple Podcasts
Spotify