The U.S. pension risk transfer market is booming as more companies look to shed their pension liabilities, but changes to the rules governing such transactions could be coming, which is making some stakeholders nervous.

“What I worry about is that we see something proposed that disrupts the system that’s working well,” said Kent A. Mason, a Washington-based partner at law firm Davis & Harman LLP and outside counsel for the American Benefits Council.

“To me, where do you go from the toughest standard that there is — the safest available annuity standard?”

As required by SECURE 2.0, a retirement security package Congress passed in December, the Department of Labor’s Employee Benefits Security Administration is currently reviewing its Interpretive Bulletin 95-1, guidance promulgated in 1995 that relates to the fiduciary standards under the Employee Retirement Income Security Act of 1974. IB 95-1 outlines the process plan fiduciaries must take when executing a pension risk transfer. Chiefly, the bulletin states that plan fiduciaries must take steps to obtain the safest annuity available unless, under the circumstances, it would be in the interest of the participants and beneficiaries to do otherwise, according to an EBSA report published in July.

Per SECURE 2.0, the department must submit a report to Congress by December outlining its findings and suggestions on IB 95-1.

As part of its review, department officials have been meeting with dozens of stakeholders on how IB 95-1 is currently working, how it could be improved, and whether there are any trends or developments in the pension risk transfer market that the department should consider, said Jeffrey J. Turner, deputy director in EBSA’s office of regulations and interpretations, during a July 18 ERISA Advisory Council hearing. The council heard from department officials and various industry stakeholders at the hearing to assess the pension risk transfer market and offer its thoughts to the department.

Several stakeholders, including Mr. Mason, told the council that the PRT market is already safer than the pension system and doesn’t need wholesale changes. In an interview, Mr. Mason said annuity holders who got their annuity through a pension risk transfer transaction have not lost a single dollar over the past 30 years, which cannot be said for pension plan participants.

“We have a situation where you’ve had zero losses, and if you make annuity contracts include additional provisions that don’t fit in annuity contracts, all you’re doing is adding costs, and if you add a lot of costs then fewer people are going to be able to do these pension risk transfers and get a safer annuity than they have in their pension plan,” Mr. Mason said.

The council met again Aug. 29 to discuss the issue and considered a host of recommendations to the department. But after several votes, only one recommendation garnered majority support: The department should update IB 95-1 to expand on its existing language addressing how a fiduciary should consider an annuity provider’s administrative capabilities and experience.Following the vote, Mr. Mason said that issue is covered in IB 95-1 and fiduciaries already take it into account. But he noted that the department will make its own recommendations to Congress and, possibly without discussing it with the council beforehand, may go beyond what the council advised.

Private equity questions

One of the main topics at the July 18 council hearing and the stakeholder feedback the department has received concerns the role of private equity in the market. Over the past decade, insurance companies backed by alternative money managers have gotten involved in pension risk transfers, including American National Group Inc., which was purchased by Brookfield Asset Management Reinsurance Partners Ltd. last year. Those managers allow the insurers easier access to private assets that carry the promise of higher returns.

Some stakeholders would like the department to amend IB 95-1 to focus the attention of plan fiduciaries on risks related to the ownership structure of the annuity provider and the extent to which the annuity provider relies upon non-traditional investments and liabilities as well as reinsurance, among other things, the EBSA report noted.

One of several groups that addressed the ERISA Advisory Council in July with concerns over the changing pension risk transfer landscape was the Pension Rights Center, a non-profit, non-partisan consumer organization that protects and promotes the retirement security of workers.

The Pension Rights Center “has strong concerns that the entry of private equity firms could add potential risk into this market,” said Karen Friedman, the group’s Washington-based executive director, in an email. “From a consumer perspective, it is critical that DOL takes a long and hard look at the role of private equity firms as they scoop up assets in this market, since we worry that their focus is on making quick and big bucks, not on the long-term pension security of workers and retirees.”

Private equity-owned insurance companies held $472 billion in cash and invested assets in 2021, according to the latest data from the National Association of Insurance Commissioners cited in the EBSA report. Just over 95% of these assets comes from life insurance companies and account for 8.7% of the life insurance industry’s assets.

As recently as 2014, there were only eight insurers selling annuity contracts, but now there are 21 insurance companies in the market.

Among the most visible of the newer insurers is Athene Holding Ltd., which was established by Apollo Global Management Inc. in 2009. Previously a minority shareholder in the company, Apollo completed an $11 billion deal to fully acquire the insurer in January 2022.

In response to stakeholder concerns raised during the ERISA Advisory Council hearing, William J. Wheeler, Athene’s New York-based vice chairman, challenged anyone at the hearing “to look at Athene’s business model and its capital position and risk management and customer service, and conclude anything other than Athene is a strong and prudent business looking out for the interests of its policy holders.”

Sean C. Brennan, Greenwich, Conn.-based executive vice president of pension group annuity and flow reinsurance at Athene and partner at Apollo, explained in an interview that while separate entities, Apollo shares in all of Athene’s performance outcomes, which is a powerful incentive for prudent management.

Mr. Wheeler added at the council hearing: Apollo’s “incentives are absolutely aligned with us and that’s the way you want it. I would rather have Apollo assets than some third-party that, frankly, has no skin in the game.”

Athene has said publicly that it welcomes facts-based studies and regulatory proposals, but Mr. Brennan said there’s been misinformation about the risks of private equity in the pension risk transfer market and added that certain changes could lead to negative consequences. “If we make it punitively expensive and onerous for insurance to participate in the PRT space, it will inevitably reduce available options and could come with the perverse effect of undermining participant security,” he said.

Matt McDaniel, Philadelphia-based U.S. pension strategy and solutions leader at Mercer, advises plan sponsors evaluating PRT deals and said in an interview that no one insurer ownership structure is inherently better or worse than another.

He also cautioned the Labor Department against issuing any major changes to IB 95-1. “We think putting in hard, bright-line rules or very explicit criteria that include or exclude certain insurers is probably a very slippery slope and difficult to implement,” he said. “It’s hard for me to see a framework in which that would improve the decision-making process rather than make it more onerous and cumbersome, and potentially even reduce insurer competition. From a plan sponsor standpoint, having insurers that are active in this space and want to take liabilities is a good thing because it makes for a more efficient, liquid market.”

When evaluating insurers on behalf of a plan sponsor, Mercer considers factors beyond those outlined in IB 95-1, such as liquidity and administrative capabilities. Mr. McDaniel said the Labor Department formalizing those factors in the bulletin would be welcome.

“Certainly, by judging outcomes it’s hard to pick nits at the current system … not a dollar has been lost by a beneficiary in a PRT transaction in the last 30 years,” Mr. McDaniel said. “So certainly, it’s working pretty well from that standpoint. Having said that, the market is evolving rapidly, particularly within the last 10 years. There’s been a lot more volume, many more deals, much more dollars of premium flowing out, many more insurers operating in this space.”

U.S. pension risk transfer activity hit an all-time high for the first half of a calendar year in 2023, with at least 289 pension buyout and buy-in transactions totaling $22.4 billion in premiums in the six months ended June 30, according to Aon PLC’s 2023 midyear update. For the six months ended June 30, 2022, there were at least 204 transactions totaling $17.1 billion.

Of note, AT&T Inc., Dallas, announced in May an agreement to purchase group annuity contracts from two Athene Holding subsidiaries to transfer $8.1 billion in U.S. pension plan liabilities.