Sanders, Van Hollen Introduce Bill to Cut Executive Tax Break to Shore Up Pensions

Sens. Bernie Sanders of Vermont and Chris Van Hollen of Maryland have introduced legislation they say will free up $15 billion to fund struggling multiemployer pension plans by eliminating the tax advantages of executive deferred-compensation retirement plans.

The proposed bill, called the CEO and Worker Pension Fairness Act, is in response to a recent Government Accountability Office (GAO) report commissioned by Sanders. The report found that 80% of the 500 largest US public companies provided executive retirement plans to approximately 2,300 top executives, totaling about $13 billion in accumulated plan benefits. The $15 billion in savings claimed by the bill’s sponsors comes from an estimate of a similar provision, although Sanders’ press office did not respond to a request for the source of that estimate.

“It is outrageous that a corporate executive in America can get unlimited, special tax privileges on hundreds of millions of dollars in savings, while an ordinary worker can only get tax deferment of up to $19,500 on a 401(k),” said Sanders in a statement. “We are going to end these tax breaks for CEOs and use that money to protect 1.7 million workers who are worried about a decent retirement as they face instability in their current pension plans.”

The bill would direct all revenue raised from the changes to the tax treatment of nonqualified deferred compensation from the Treasury to the Pension Benefit Guaranty Corporation (PBGC) to shore up multiemployer pensions. According to the PBGC, its multiemployer program is projected to run out of funds by 2025.

For more stories like this, sign up for the CIO Alert newsletter. 

According to the GAO report, CEOs accumulated more executive retirement plan benefits than the next four highest compensated executives. It said that as of 2017, CEOs had accumulated an average of $14 million in executive retirement plan benefits, while CFOs had accumulated an average of $3 million, and the next three most highly compensated executives accumulated an average of $3.4 million in plan benefits.

The proposed legislation would also require the Department of Labor (DOL) and the Internal Revenue Service (IRS) to provide oversight and transparency for executive retirement plans. The IRS oversees executive retirement plans for compliance with federal tax laws, such as ensuring that key executives are taxed on deferred compensation in certain cases where that compensation has been set aside, such as when a defined benefit pension plan sponsor is in bankruptcy.

“However, IRS audit instructions lack sufficient information on what data to collect or questions to ask to help its auditors know if companies are complying with this

requirement,” said the GAO report. “As a result, IRS cannot ensure that companies are reporting this compensation as part of key executives’ income for taxation.”

And the DOL oversees the deferred-compensation plans to ensure that only eligible employees participate in them since the plans are excluded from most of the federal protections that cover retirement plans for rank-and-file employees. The DOL requires companies to report the number of participants in the plan; however, the GAO said the one-time single page filing does not collect information on the job title or salary of executives, or the percentage of the company’s workforce participating in the plans.

“Such key information could allow DOL to better identify plans that may be including ineligible employees,” said the report. The GAO also said that without reviewing its reporting requirements to ensure adequate useful information, the DOL may continue to “lack insight” into the make-up of the plans.

“Our bill sends a message to corporate America: We will no longer tolerate a system in which CEOs are showered with endless tax breaks,” said Sanders. “We are ending a two-tiered system that gives special tax breaks to billions of dollars in corporate executives’ savings while letting workers’ pensions disappear.”

Tags: Bernie Sanders, CEO and Worker Pension Fairness Act, Government Accountability Office, Multiemployer Pension Plans, PBGC, Pension Benefit Guaranty Corporation

Actuarial and consulting firm Milliman has launched a pension buyout index that estimates the average cost of a pension risk transfer strategy. The firm said it created the Milliman Pension Buyout Index (MPBI) because plan sponsors considering a plan termination or de-risking strategy need to be able to monitor the annuity market, which continues to show strong growth.

According to the LIMRA Secure Retirement Institute, almost half of all defined benefit pension plans in the US are frozen, and eight in 10 defined benefit plan sponsors are very or somewhat interested in a pension risk transfer deal. And in 2019, there were a record number of contracts sold in both the buy-out and buy-in markets with total group annuity risk transfer sales reaching $30.5 billion for the year, an 8% rise from 2018. And LIMRA said it expects pension risk transfer sales to continue to grow in 2020.

“With an increase in activity in the pension risk transfer market in recent years, understanding the correlation between annuity pricing and pension liability is essential,” Mary Leong, a consulting actuary with Milliman, said in a statement. “Tracking annuity pricing rates will enable plan sponsors to approach a de-risking strategy armed with more information on cost trends in the market.”

The MPBI uses the FTSE Above Median AA Curve, along with annuity purchase composite interest rates from insurers, to estimate the average cost of a pension risk transfer annuity de-risking strategy. The annuity pricing composites are provided by several major insurers, including Prudential, American United Life Insurance Company, AIG’s American General Life Insurance Company, Minnesota Life Insurance Company, and Pacific Life.

Want the latest institutional investment industry news and insights? Sign up for CIO newsletters. 

According to the index’s most recent results, the estimated cost to transfer retiree pension risk to an insurer remained relatively flat during January, with costs edging up to 104.3% of a plan’s total liabilities from 104.2%. This means the estimated retiree pension risk transfer cost for the month is 4.3% more than those plans’ retiree accumulated benefit obligation (ABO).

The firm said the lack of MPBI movement in January was the result of discount rates and annuity purchase rates decreasing in parallel by 35 basis points each, which in turn kept the relative cost of annuities relatively flat.

Milliman said plan sponsors should note that the new index shows an average cost estimate, and that individual plan annuity buyouts can vary based on plan size, complexity, and competitive landscape. Additionally, specific characteristics in a plan’s design or participant population can affect the cost of a pension risk transfer, which could make settling pension obligations with an insurer more or less expensive than estimated.

Tags: Annuity, buy-in, buyout, LIMRA Secure Retirement Institute, MBPI, Milliman, Milliman Pension Buyout Index, Pension Risk Transfer