ProtectSeniors.Org is working to protect retirees against pension de-risking, also known as pension stripping. Below are some frequently asked questions about pension stripping.
What is pension de-risking?
Pension de-risking in its most general form is any kind of action taken by a plan sponsor to reduce the plan sponsor’s exposure to its pension liabilities. Examples of pension de-risking include:
- Freezing pension benefits to some or all of the plan participants.
- Changing the pension investment strategy to reduce what is known as an asset-liability mismatch.
- Offering lump sums buyouts to some or all of the plan participants.
- Annuity “buy-ins” where the plan sponsor purchases one or more annuity contracts to cover pension obligations with the plan sponsor remaining as the owner of the annuity contract(s).
- Annuity “buy-outs” where the plan sponsor transfers some or all of its pension liabilities to an insurance company or other annuity provider by purchasing, at a premium, a group annuity contact. This is what Verizon did in December, 2012. Prior to 2012, annuity “buy-outs” had only been used in connection with the termination of a defined benefit plan. Verizon selected 41,000 management retirees and basically kicked them out of the pension plan. The Verizon “buy-out” was different from previous “buy-outs” in that the annuity purchase did not result in a termination of the defined benefit plan.
Why do retirees call pension de-risking “pension stripping”?
Referring to an annuity buy-out as pension stripping is more accurate because when the company or plan sponsor offloads its pension obligations to an insurance company or other annuity provider retirees lose all of the comprehensive and uniform protections intended by Congress under the Employee Retirement Security Act of 1974 (ERISA), including the financial safety net provided by the Pension Benefit Guaranty Corporation (PBGC). Regular financial disclosures are no longer required and ERISA fiduciary standards and protections are also lost. Offloading pension obligations to an insurance company might allow the company to “de-risk” but an annuity buy-out STRIPS the retiree of his or her comprehensive and uniform federal protections and makes each individual subject to the vagaries of state law.
What exactly do retirees lose in a pension stripping transaction?
- ERISA’s fiduciary duty standards,
- Mandated annual financial disclosures,
- Minimum funding thresholds,
- Uniform protection from creditors and bankruptcy trustees,
- Ready access to the federal courts, and
- PBGC coverage.
Why would a company “de-risk” via an annuity buy-out transaction?
Most of the reasons are financial. Defined benefit plans are dying. Statistics available from the Department of Labor show that participation in defined benefit plans fell from 38% in 1980 to 20% in 2008. In 1985, eighty-nine (89) of the Fortune 100 companies offered a traditional defined benefit pension plan; by 2012, just eleven (11) of those companies offered a traditional defined benefit pension plan.
Once a plan sponsor has purchased a group annuity contract and offloaded its pension obligations, the plan sponsor no longer needs to pay premiums to the PBGC and no longer carries the pension obligations on its books. This may bolster the company’s balance sheet and reduce future pension related expenses. It may improve corporate credit ratings which could translate into lower borrowing costs. Unfortunately, it also strips retirees of their federally mandated protections under ERISA and dumps them into a non-uniform system of state laws.
What is ProtectSeniors.Org doing to protect retirees?
ProtectSeniors.Org is working with legislators in New York, New Jersey, Connecticut, Massachusetts and Florida to introduce legislation that would provide protections for retirees who are subject to pension stripping transfers. The proposed legislation would require:
- Mandatory disclosure and an opportunity to challenge or opt-out of any de-risking transaction;
- Supplemental protections in the form of a third party guarantee or reinsurance; uniform fiduciary standards;
- ERISA equivalent protection from creditors and bankruptcy trustees; and
- A “cash out” option subject to mandatory disclosures regarding tax consequences and dissipation risks, including independent legal or financial advisor oversight.
ProtectSeniors.Org also submitted the Pension De-Risking Model Act at the National Conference of Insurance Legislators (NCOIL) Annual Meeting in November, 2013 and the proposed Model Act was debated at the NCOIL’s spring meeting in March, 2014. NCOIL is an organization of state legislators whose main area of public policy concern is insurance legislation and regulation and NCOIL Model legislation often serves as a basis for legislation that is adopted by various states. Many legislators active in NCOIL are also members of the committees responsible for insurance legislation in their respective state legislature.