DOL may review ‘derisking’ pension risk transfers, says congressional report

A recent Department of Labor report to Congress reaffirming current fiduciary standards for selecting annuity providers in defined benefit pension plans also includes notice that it may review the increasingly common, and controversial, practice of companies transferring pension risks to life insurers, commonly known as “derisking.”

The report by the DOL’s Employee Benefits Security Administration (EBSA), which was mandated by 2022’s SECURE 2.0 Act, reviews its 1995 Interpretive Bulletin 95-1 that outlined the responsibilities of fiduciaries under the Employment Retirement Income Security Act (ERISA).

EBSA essentially reported that the guidelines for evaluating an annuity provider’s ability to pay claims and their creditworthiness are still relevant and there’s no immediate need for any updates or changes.

“The DOL got it right in holding off on any new proposal to amend its Safest Available Annuity Standard,” said Preston Rutledge, former Assistant Secretary of Labor for the EBSA and consultant to The American Council of Life Insurers (ACLI). “In fact, the department’s clear message is that after nearly 30 years, its 1995 guidance on employers’ fiduciary standards when selecting an annuity provider for a traditional pension plan has stood the test of time.”

The DOL is seeking broader public input to determine how Interpretive Bulletin 95-1 might be amended to better protect participants and beneficiaries. Any proposed changes will be open to public notice and comment, ensuring transparency and stakeholder engagement in the decision-making process.

Need for 'derisking' review

The report, however, seemed to acknowledge concerns from some stakeholders that EBSA needs to review “derisking,” and address issues such as insurers’ ownership structures, exposure to risky assets, non-traditional liabilities, and the use of affiliated and offshore reinsurers that might be out of regulatory reach. While some industry leaders believe the current bulletin covers those topics, EBSA said there’s a need for further consideration.

"We are committed to further exploring the issues raised to ensure fiduciaries meet their obligations to participants and beneficiaries,” said Lisa M. Gomez, assistant secretary for EBSA.
While ERISA does not prohibit employers from transferring pension obligations to insurance companies ERISA does require that a fiduciary obtain the “safest annuity available.”

Legal challenges faced

Massive pension risk transfers to insurers by such companies as AT&T, Alcoa, GE, and Lockheed Martin are facing legal challenges from participants who contend the companies failed to meet the DOL standards for selecting the safest available insurer when transferring pension assets and liabilities to an insurance company.

In the GE case, which was filed on June 28 in the U.S. District Court for the Northern District of New York, the plaintiffs challenge GE’s choosing Athene Annuity & Life Assurance Company of New York to assume its $1.7 billion of its pension obligations, stating that Athene is a “highly risky private-equity controlled insurance company with a complex and opaque structure.”
The transaction involved shifting 70,000 GE retirees and their beneficiaries to Athene through purchasing group annuity contracts.

Attorneys for the plaintiffs say such risk transfers eliminate government protections such as ERISA, and the federal Pension Benefit Guarantee Corp.

“When the companies offload their pension obligations to insurance companies, those protections go away, ERISA no longer applies, also the Pension Benefit Guarantee Corporation no longer applies,” said attorney Jerry Schlichter, founder and managing partner of the law firm Schlichter Bogard, that represents plaintiffs in most of the class action suits. “It’s not illegal but a substantial pool of money to back any defaulting pension plan is gone.”

Insurance companies and trade groups have assailed the lawsuits.

Derisking complaints called 'baseless'

“These are baseless complaints instigated by class action attorneys who are attempting to enrich themselves at the expense of retirees,” said a statement from Athene. “Athene is a safe and secure provider of annuity benefits, with outstanding financial strength, proper reserves, excellent capitalization, and strong credit ratings.”

ACLI Vice President & Deputy, Retirement Security James Szostek also took issue with the derisking critics.

“The data show little to no risk to traditional pension plan participants under a pension risk transfer” Szostek said. “Over the past 30-plus years, no one has lost a penny who has been receiving an annuity as a result of a pension risk transfer arrangement.”

Perhaps so, but along with the loss of protection, Schlichter contends the market value of the pension plans is also diminished in some derisking transfers.

“The law says the company pension funds must work for the sole interest of their employees,” Schlichter said. “They cannot work for their self-interest because it's not their money. We allege, for example, that because Athene is offering a lower price to take on those liabilities, it's saving the employer with the pension plan money, which they're getting by putting people in riskier annuities. It’s improper because that's not in the interest of their employees, and they shouldn't be doing that.”

A 2022 study by NISA Investment Advisors LLC, an independent, employee-owned investment management firm found that pension risk transfers issued by lower-quality annuity providers harm participants by as much as $5 billion annually through uncompensated credit risk.
NISA computed the credit spread differences between insurers into the implied cost that beneficiaries bear to individual insurance companies,” finding that Athene placed last among nine leading annuity providers with credit risk costs reaching 14% compared to zero for New York Life.

“Pension group annuities provide many protections that enhance retirement security,” said the Athene statement. “Insurers like Athene have deep expertise in managing annuity obligations, are subject to robust regulation, and hold regulatory capital to protect policyholders.”

Schlichter and others note, however, that the very creation of the DOL’s guidelines for choosing annuity providers came about following the 1991 collapse of Executive Life, which was seized by the California insurance commissioner and its investment portfolio sold to Leon Black, co-founder of Apollo Global Management. Losses to policyholders from the Executive Life takeover were estimated at $3.9 billion. Apollo is the parent company of Athene.

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Doug Bailey is a journalist and freelance writer who lives outside of Boston. He can be reached at [email protected].