While pension risk transfer (PRT) deals continue to break records, federal regulators are nearing a deadline for review and recommendations of Interpretative Bulletin 95-1.

Issued by the Department of Labor in 1995, IB-95 lays out the fiduciary standards for selecting an annuity provider for a pension risk transfer. Under the rule, pensions must consider the provider’s investment portfolio, size relative to the annuity contract, level of capital and surplus, liability exposure, and availability of state government guaranty associations.

According to provisions in the SECURE Act 2.0 Act of 2022, the Department of Labor must review IB 95-1 and recommend updates to Congress by the end of 2023.

That review has suddenly become very important, as the PRT market is expected to remain red hot for the near term. A 2023 mid-year report by Aon showed 289 pension risk transfer transactions, totaling $22.4 billion in premiums.

Likewise, the MetLife 2023 Pension Risk Transfer Poll found that 89% of defined benefit plan sponsors intend to divest all of their DB pension liabilities.

Many PRT deals are being done by investment-focused firms eying large pots of money. Regulators have concerns about ensuring that retirement dollars are being adequately protected.

“In recent years some regulators and stakeholders have raised concerns about private equity firms’ increased involvement with insurers and reinsurers who assume responsibility of beneficiary payments and pension risk transfers,” said David Mendes, director, communication and public affairs for the American Academy of Actuaries.

Academy experts held a conference call last week to discuss PRT issues.

Several issues under consideration

The DOL’s Employee Retirement Income Security Act Advisory Council hosted a stakeholder hearing in July to receive feedback on potential changes to IB 95-1. Several comments were received, including by Athene, a annuity insurer owned by Apollo Global Management, a private-equity firm.

In its comments, Athene said it counts more than 600,000 pensioners among its customers, the result of more than 40 pension transactions. IB 95-1 is working as it was intended, Athene said in a letter signed by Sean Brennan, executive vice president of pension group annuity and flow reinsurance for Athene.

“To our knowledge, not a single person who has received an annuity from a pension plan has seen any benefits cut due to an insurer’s inability to satisfy its obligations,” Brennan wrote. “There is simply no compelling need to overhaul IB 95-1.”

A big issue surrounds the underlying investments that support the future annuity guarantees. Those investment choices have become riskier, a point Athene acknowledged and explained in its letter. Critics are concerned about Athene’s use of structured credit investments and its Bermuda-based reinsurance agreements, the insurer noted.

Structured credit is a victim of “misplaced guilt by association,” Brennan wrote, due to its role in the 2008-09 financial crisis. “Today’s asset-backed securities, including CLOs, bear no resemblance to the sub-prime residential mortgage-backed securities (RMBS), which were the risky, highly levered, undiversified structured credit products that played a role in the crisis,” he added.

Athene also defended the regulatory regime that covers Bermuda-based reinsurers, and said it allows for capital formation and foreign third-party investment.

Cybersecurity and other issues

An updated IB 95-1 should require fiduciaries to consider both the use of reinsurance and the cybersecurity administration of the provider, wrote Agilis, an insurance consultancy in the pension risk transfer market, in its comment letter.

Michael Clark, a managing director and consulting actuary with Agilis says cybersecurity “should be explicitly mentioned in the standard,” the site chief investment officer reported.

Cybersecurity is one of a number of issues that are being discussed as the DOL winds down its review of IB 95-1.

“There was a recommendation to more formally include administration as a factor and to look at things such as call response times, web capabilities, how they go about finding lost participants who are hard to contact, and issues of cybersecurity, which are certainly more important now than they were 20 years ago,” said Linda K. Stone, senior pension fellow with the American Academy of Actuaries.

A big customer service issue is simple communication – the requirement to contact plan participants when their pensions are transferred in a PRT deal, Stone explained.

“This is a situation where plan participants can be upset [with] this employer they’ve worked for for 30 years – suddenly their benefit is moving to another entity,” she said.

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