The Chairs of the two Senate committees that govern pensions sent a letter last week to the heads of government agencies overseeing pensions requesting additional guidance on pension de-risking. The letter was written by Senator Wyden (D-Or), as Chair of the Committee on Finance, and Senator Harkin (D-IA), as Chair of the Committee on Health, Education, Labor and Pensions, and the letter was directed to the heads of the Department of Treasury, Department of Labor, Pension Benefit Guaranty Corporation (PBGC), and the Consumer Financial Protection Bureau.
Many sponsors of defined benefit plans are considering ways to ”de-risk” by reducing or eliminating the volatility associated with their pension obligations for financial accounting and pension funding purposes. There are two categories of “de-risking” activities: in-plan strategies and settlement strategies. In-plan strategies include managing plan assets to minimize volatility (for example, through liability-driven investing). Settlement strategies include lump sum distributions and transfers of liabilities to insurance companies. Some very large pension settlements have already occurred.
The senators’ letter refers to in-plan strategies as “win-win” situations because the pension plan remains intact and shielded from market fluctuations. In contrast, the letter identifies concerns regarding settlement strategies. The letter notes that a transfer of liabilities to an insurance company eliminates ERISA coverage, including insurance by the PBGC. The letter also notes that lump sum distributions require participants and beneficiaries to bear investment risk and manage their own assets to last over their lifetimes.
The request for guidance focuses on disclosure and annuity selection. The two senators seek guidance requiring (a) advance notice to participants of pension de-risking and (b) disclosure of “risks to participants,” such as the loss of ERISA protections and limitations of state guarantee associations. They also seek additional disclosures relating to lump sum offers, including a warning of the risk of outliving one’s assets. The requested guidance would also establish “new standards” for annuity contracts purchased by plans to ensure that the contracts replicate ERISA’s protections as much as possible.
The letter also addresses the possibility of settling liabilities without terminating the plan. Typically, liabilities are settled before a plan termination by either distributing lump sums to participants or distributing annuity certificates under a group annuity contract with an insurance company. The IRS issued several private letter rulings this year and in 2012 permitting plans to offer lump sums to retirees who were receiving annuity payments. The senators state that “it is imperative” to have guidance as to when settlement is permitted outside the plan termination context.
The senators’ request follows hearings held by the ERISA Advisory Council two years ago. Although some at that time called for a moratorium on pension de-risking, the Council’s recommendations, like the recent letter by Senators Harkin and Wyden, similarly focused on disclosure to participants and standards for annuity selection. To date, the regulatory agencies have not issued guidance in response to the recommendations of the ERISA Advisory Council or commented on the recent letter from the Senators Harkin and Wyden. However, last September, the PBGC issued a proposal to collect information from plan sponsors regarding certain pension de-risking activity. Under the proposal, plan sponsors would be required to report to the PBGC each year “undertakings to cash out or annuitize benefits for a specified group of former employees.”