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Compliance August 7, 2023
Pension Risk Transfers in No Need of Overhaul, Insurance Executives Say
Minor changes, such as requiring pensions to consider cybersecurity before selecting an annuity provider, could be positive, however.
Reported by Paul Mulholland
Representatives of the life insurance and pension risk transfer industry say that only minimal changes, if that, are needed to the Department of Labor’s Interpretive Bulletin 95-1 that governs fiduciary standards for selecting an insurer for a pension annuitization.
The SECURE 2.0 Act of 2022 requires the Department of Labor to study IB 95-1 and report its findings and any recommended changes to Congress by the end of this year.
The DOL’s ERISA Advisory Council hosted a stakeholder hearing in July to discuss possible changes to IB 95-1. In a written submission to the council, Agilis, an insurance consultancy in the pension risk transfer market, explained that IB 95-1 is working well, but some positive changes could still be made.
The firm stated that an updated IB 95-1 should require fiduciaries to consider both the use of reinsurance and the cybersecurity administration of the provider. Michael Clark, a managing director and consulting actuary with Agilis says cybersecurity “should be explicitly mentioned in the standard.”
Fiduciaries should also be made aware that they can use more than one independent expert when determining the safest annuity provider available, according to Agilis, and the DOL should make IB 95-1 a formal regulation, rather than an interpretive statement, so it has clearer legal force. Clark said the “DOL should issue formal regulations that codify IB 95-1.”
The Agilis statement also noted that some of the more common concerns about the PRT marketplace, as expressed at the hearing by advocates for labor and the elderly, are already addressed by IB 95-1. For example, the role of private equity investors as owners of insurance companies and that structure’s potential to create conflicts is addressed by the requirement to consider the insurer’s other liabilities or “lines of business.” Another concern, that insurers are adopting riskier investment portfolios, is also addressed already: “The quality and diversification of the annuity provider’s investment portfolio” is listed in IB 95-1, Clark said.
A written statement by retirement services and annuity provider Athene to the ERISA Advisory Council explained that part of the reason for moving to less liquid or riskier investments is because corporate bonds are more correlated and therefore less diversified than they have been in years past. This creates a need to diversify out of lower risk bonds.
Athene stated that “there is simply no compelling need to overhaul IB 95-1” because the legitimate concerns about PRTs are already addressed by IB 95-1, and no PRT payment has been missed because of a solvency issue since IB 95-1 was issued, a remark repeated by other representatives of the industry at the hearing.
Many labor advocates argued at July’s hearing that annuitizing pension obligations removes Employee Retirement Income Security Act and Pension Benefit Guaranty Corporation protections from plan participants because life insurance companies are not backed by the PBGC or directly subject to ERISA.
Clark says it is “arguable that you are losing ERISA protections” because the provisions of the plan are transferred to the insurer and priced. The PRT product will normally mirror the benefits of the plan, and since that plan was designed under and subject to ERISA, the annuity is functionally the same.
Clark adds that the PBGC backup is not as great as some make it out to be. Pensions fail more frequently than insurance companies, and the PBGC typically requires participants to take a “haircut”—sometimes a heavy one.
The PBGC does provide a guaranteed level of protection, and as an institution, is less likely to become insolvent than a life insurance company because it is backed by the federal government. This means that though participants may have to take a haircut when the PBGC takes over their pension, they are not facing the same risk they would be if their annuity manager becomes insolvent.
Clark concedes this point and says, “Both systems provide protection” but adds that it is “hard to see a scenario where people lose as much as they might if the PBGC takes over their benefits” and that when it comes to a catastrophic failure of an annuity provider such that participants take a heavier hit than they would under the PBGC, “the likelihood of that isn’t zero, but it is pretty darn close to it.”
As defined contribution retirement plans become the dominant retirement savings vehicle for American workers, policymakers and plan fiduciaries must embrace necessary changes to make these plans work better for more workers. While we’ve made great progress in helping workers save for retirement through auto-enrollment, auto-escalation and qualified default investment alternatives, we still have gaps that have allowed retirement plan loan default leakage to become a more than $2 trillion problem. The two most significant sources of leakage identified by the non-partisan Employee Benefits Research Institute are cash-outs and loan defaults when workers leave their jobs. Fortunately, there is an opportunity for industry and plan leaders to address both issues.