Protecting Retirees in Pension De-risking by Companies
Many companies are deciding to shed pension plan liabilities. A number of financial institutions are willing, for a fee, to takeover plan assets in exchange for annuity payments. Protections are proposed by the NRLN/AREF that would make de-risking in the form of buying annuities more secure for plan participants:
If the plan is not terminated pursuant to ERISA Section 4041, after review and approval by PBGC, the plan has a fiduciary duty to continue to hold the annuity contracts as a plan asset, so that retirees do not lose PBGC or other protections.
Alternatively, the plan sponsor can choose to permanently transfer its liability for individual retirees to a qualified annuity provider, as if the plan were terminated, but only if it complies with one of the following requirements:
- the plan obtains the affirmative consent of individual retirees.
or
- the plan can purchase reinsurance from a separate, highly-rated insurer that guarantees the payment of benefits, in case of default, of each individual participant’s loss to the extent it is not covered by state insurance guarantee associations (SGAs).
The purchase of the annuity contract – and any reinsurance purchased must be reviewed and approved by the Department of Labor (DOL) based on the criteria in the safe annuity rule adopted in DOL’s Interpretive Bulletin 95-1.
The plan sponsor must send a formal notification to all plan participants at least 90 days prior to the transaction, with specific disclosures about the impact on participants and on the plan’s funding status, as well as any alternatives available to the participant (such as choosing not to participate).
If Federal agencies do not act, Congress must at a minimum require plan sponsors to maintain back-up insurance, either from the PBGC or a highly-rated reinsurance carrier.
For more details, read the white paper on Pension Plan “DeRisking”: Strengthening Fiduciary Duties to Protect Retirees.
