The ERISA Advisory Council this week hosted a consultation with stakeholders in the pension and insurance industries to discuss possible modifications to Interpretative Bulletin 95-1.
IB 95-1, issued by the Department of Labor in 1995, describes the fiduciary standards for selecting an annuity provider for a pension risk transfer. The rule requires pensions to consider the provider’s: investment portfolio, size relative to the annuity contract, level of capital and surplus, liability exposure, availability of state government guaranty associations.
The SECURE 2.0 Act of 2022 requires the Department of Labor to review IB 95-1 and recommend possible modifications to Congress by the end of 2023.
At the hearing, there were some commonly recommended modifications informed by changes to the insurance market since 1995. The modifications included: consideration of the ownership structure and business model of the insurance company, the insurer’s use of re-insurance, and the insurer’s use of off-shore and arbitrage strategies. The investment portfolio of the insurance company, already required to be considered under IB 95-1, was also highlighted by multiple speakers as an essential consideration.
David Certner, the legislative policy director at AARP, said at the hearing that PRTs are generally done to de-risk plans and not for the benefit of participants. He says that PRTs are not a per se violation of fiduciary duty because the transfers are something that plans are empowered to do, even though they might not benefit participants, similar to how terminating a plan generally does not benefit participants.
Plans “generally do this for their own purposes” to avoid carrying liability but while this “may have been an interesting question 40 years ago” it has been “settled law for quite some time now that plans are permitted to do this.”
Certner explains that IB 95-1 does not lay out criteria for whether or not to annuitize a pension but what a fiduciary must consider when selecting an annuity provider once that decision has been made. Like other speakers, Certner recommended that the DOL add review of insurance company ownership structure, re-insurance, and track record of managing long term commitments to a new bulletin.
Norman Stein, a senior policy advisor and acting legal director at the Pension Rights Center, emphasized the fact that when a pension annuitizes, pensioners’ benefits no longer have the legal protections of ERISA, since annuities are an insurance product, which is not covered by the Employee Retirement Income Security Act. He argued that ERISA fiduciaries should be required to obtain as many ERISA-like contractual guarantees from insurance companies upon annuitizing.
Stein also noted that the PBGC backs up pensions but not annuities and said, “as a participant, I would rather have a government guarantee.” He recommended that an annuity provider should be required to insure the annuity with another insurer so that if the first insurer becomes insolvent, the annuity would be backed up at levels resembling PBGC minimum requirements, such that the annuity effectively has a market equivalent of PBGC protection.
The loss of ERISA protections upon annuitizing was also highlighted by Edward Stone, the founder of Retirees for Justice. He said that the DOL should require fiduciaries to publish a written report describing their reasoning for annuitizing. He recognized that this was an unusual requirement but argued that it was justified because of the extraordinary protections of ERISA that the participant would be losing.
Michael Calabrese, a legislative strategist with the National Retiree Legislative Network, expanded on the arguments made by Stein. He recommended creating a fiduciary safe harbor for plans that obtain explicit ERISA-like protections in their annuitization contract.
Several representatives of the life insurance industry were present at the hearing and bristled at the sometimes harsh criticism of their industry. Mariana Gomez-Vock and Howard Bard, two vice-presidents of the American Council of Life Insurers, noted that no insurance company has failed to make a pension payment after a PRT due to a solvency issue.
They added that “reinsurance is a complicated but essential feature” of the insurance industry that has been around “for over 200 years.” If an annuity provider purchases re-insurance, the original provider “is still on the hook 100%” for their obligations, they explained.
The DOL is required to issue a report to Congress by the end of the year offering recommendations for an update to IB 95-1.
Tags: annuities, ERISA, Pension Risk Transfer