US. Pending DOL Report to Consider Pension Risk Transfer Changes

  • Report to Congress in clearance process, EBSA chief says
  • DOL weighing in may have chilling effect on risk transfers

Large employer pensions looking to offload their funding liabilities through pension risk transfers are anticipating tougher future regulatory scrutiny as the US Labor Department prepares a report for Congress on the $45 billion de-risking market.

The Employee Benefits Security Administration’s report appears likely to propose changes to a 1995 interpretive bulletin on pension risk transfers that laid out standards for employers in selecting third-party insurers to convert plan funds into annuity contracts.

The report to Congress is in the agency’s clearance process, DOL Assistant Secretary for Employee Benefits Security Lisa M. Gomez said earlier this month at an American Bar Association panel in Washington, D.C.

Ballooning surpluses due to market performance and high interest rates drove a record 773 corporate pensions opting to pass off liability to insurers in 2023, with companies like Verizon Communications Inc. and Shell USA Inc. among those getting in on the trend this year. Some pension industry stakeholders say they would welcome clarity from DOL, while others worry the report to Congress would discourage employers from transfers.

“The fear is that the Department of Labor report could have a chilling effect on the pension risk transfer marketplace,” said Howard Bard, senior vice president and deputy general counsel for the American Council of Life Insurers. “That is, limiting employers’ ability to shift unknown future liability away from themselves and into an insurance company that specializes in long-term risk management.”

More Clarity Welcome
Congress passed the SECURE 2.0 Act in 2022, giving EBSA a December 2023 deadline to complete a report on potential updates to the existing annuity transfer guidance under Interpretive Bulletin 95-1.

The past-due report could recommend formal rulemaking, or another update to sub-regulatory guidance on the current standard. IB 95-1 instructs plans to consider the “safest available annuity” in choosing a target for pension risk transfers, among other selection factors.

“Because the report has not yet been sent to Congress, it is premature to discuss the Department of Labor’s conclusions about IB 95-1,” a DOL spokesman said in a May 10 statement.

For pension participant advocacy groups, more clarity on the almost 30-year-old guidance would be welcome, especially for answering questions emerging from a string of class action suits against AT&T Inc., Alcoa USA Corp., and Lockheed Martin Corp.

Those lawsuits filed by workers with company pensions challenge de-risking with Athene Holding Ltd., a subsidiary of Apollo Global Management Inc. The plan sponsors breached their fiduciary duties under the Employee Retirement Income Security Act by choosing an annuity provider with a highly risky structure, the suits said.

The ongoing litigation will likely factor into the DOL’s upcoming report, with the regulator facing pressure to proactively address the alleged violations with more specific guidance, according to Ada Dolph, partner at Seyfarth Shaw LLP.

“With the lawsuits that have been happening, there’s been increased focus on private equity getting into this area of risk transfers, and a lot of concern that private equity is supported by investments that may be at some level riskier than a traditional insurance company,” she said.

In its report, the Labor Department may also highlight the need for fiduciaries to consider an insurance company’s ownership, control, and ability to administer payment of benefits, as well as providing a model statement that fiduciaries can show to participants explaining the risk transfer, according to Dolph.

The Pension Rights Center and National Retiree Legislative Network have also raised concerns about how widespread the practice of pension risk transfers has become.

“We look forward to seeing the report, which we very much hope will include PRC’s recommendations to strengthen protections for workers and retirees when companies transfer their pension liabilities to insurance companies,” said Karen Friedman, PRC’s executive director. “Plan participants lose a lot in these transactions—including valuable [Pension Benefit Guaranty Corporation] insurance and other ERISA rights—and it is critical for DOL to update its guidance.”

NRLN’s president Bill Kadereit said he sees the rise of de-risking as a signal that corporations, Wall Street, and government policymakers have little tolerance for shouldering retiree legacy costs.

“There is no financial genius to dissolving liabilities you chose not to honor, nothing entrepreneurial and nothing to brag about to investors,” he said.

Industry Concerns
ACLI leaders said in April that the Labor Department should undergo a formal notice and comment rulemaking for any IB 95-1 updates, rather than issuing guidance, which can be finalized without the agency showing it to the public for feedback.

“I don’t anticipate legislative activity in this area, but I think the concern is more based on the fact that whatever would be in this report could be a foreshadowing of what they might do administratively at the department,” said Kent Mason, partner at Davis & Harman LLP.

Insurance stakeholders are also concerned that the department may seek to micromanage the relationship between plans and insurance companies, extending ERISA and PBGC protections to annuity contracts, which the DOL lacks expertise in regulating, he said.

Whether the Labor Department puts forth sub-regulatory guidance or a formal rule, the standard could prompt backlash in the form of Administrative Procedure Act litigation.

The agency was recently sued under the APA by an insurance trade association seeking to block implementation of its new fiduciary rule.

It’s unclear whether that new retirement advice standard, which would extend fiduciary status to many professionals who recommend individual rollovers for savers out of 401(k)s and into annuities or IRAs, would have any effect on potential pension risk transfer guidance, according to benefits lawyers.

There isn’t much appetite within the retirement or insurance community for a complete overhaul of the IB 95-1 norms, so more minor tweaks to that guidance is a more likely path for the DOL, said Tim Verrall, partner at Ogletree Deakins.

Many in the life insurance industry have argued that the DOL should be circumspect about changes, as defined benefit plans rely heavily upon pension risk transfers as a means for savers to access income from an alternative source like an annuity, outside of the pension itself.

“This is the only way to get out of a defined benefit plan, so if you make it too cumbersome, you’re really attacking the basis of the whole voluntary retirement system,” Mason said.

 

 

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