Industry fears impending DOL action will target pension transfer market

There is concern in the life insurance industry that a forthcoming Department of Labor report could target group annuity contracts by pension plans in pension risk transfer transactions.

The report, already overdue, comes amid a flurry of PRT deals, and a few high-profile lawsuits. A DOL spokesman did not respond to a request for comment.

Officials with the American Council for Life Insurers went public Thursday with fears that regulators will throw up roadblocks to annuity availability. The DOL report to Congress is expected to recommend changes to Interpretative Bulletin 95-1.

Issued by the DOL in 1995, IB-95 lays out the fiduciary standards for selecting an annuity provider for a pension risk transfer. Under the rule, pensions must consider the provider’s investment portfolio, size relative to the annuity contract, level of capital and surplus, liability exposure, and availability of state government guaranty associations.

"We are concerned that the report might criticize the annuitization process whereby a defined benefit plan, a pension plan, decides to send some of the pension payment obligations over to a state licensed life insurance company," explained Preston Rutledge, a consultant to ACLI and former assistant secretary of labor for the Employee Benefits Security Administration in the Trump administration.

According to provisions in the SECURE Act 2.0 Act of 2022, the Department of Labor must review IB 95-1 and recommend updates to Congress by the end of 2023.

That review has suddenly become very important, as the PRT market is expected to remain red hot for the near term. A 2023 mid-year report by Aon showed 289 pension risk transfer transactions, totaling $22.4 billion in premiums.

'Stronger and more protected'

Rutledge addressed concerns that leaving a federally regulated pension plan for a state-regulated life insurance company leaves plan participants vulnerable.

"Both systems are excellent, the defined benefit system under federal law, the insurance system under state law," he said. "But when you compare the two, at least in terms of people actually receiving their benefits for life, which is what an annuity is, if anything, the state system is stronger and more protected."

The DOL’s Employee Retirement Income Security Act Advisory Council hosted a stakeholder hearing in July to receive feedback on potential changes to IB 95-1. Several comments were received, including by Athene, a annuity insurer owned by Apollo Global Management, a private-equity firm.

Since being fully taken over by Apollo in 2021, Athene emerged as one of the most aggressive insurers targeting pension risk transfer deals. Athene ended 2023 with significant PRT deals with AT&T and Lockheed, among others, and stood atop group annuity sales with $10.4 billion, according to LIMRA.

In its comments to the DOL, Athene said it counts more than 600,000 pensioners among its customers, the result of more than 40 pension transactions. IB 95-1 is working as it was intended, Athene said in a letter signed by Sean Brennan, executive vice president of pension group annuity and flow reinsurance for Athene.

Risky investments alleged

A big issue surrounds the underlying investments that support the future annuity guarantees. Those investment choices have become riskier, a point Athene acknowledged and explained in its letter. Critics are concerned about Athene's use of structured credit investments and its Bermuda-based reinsurance agreements, the insurer noted.

Structured credit is a victim of "misplaced guilt by association," Brennan wrote, due to its role in the 2008-09 financial crisis. "Today's asset-backed securities, including CLOs, bear no resemblance to the sub-prime residential mortgage-backed securities (RMBS), which were the risky, highly levered, undiversified structured credit products that played a role in the crisis," he added.

Athene also defended the regulatory regime that covers Bermuda-based reinsurers, and said it allows for capital formation and foreign third-party investment.

Mariana Gomez-Vock is senior vice president of policy and legal for ACLI. She noted that "Bermuda is a qualified reciprocal jurisdiction" in the eyes of U.S. regulators.

The Bermuda Monetary Authority is "a dynamic system," she explained. "They've made some really significant regulatory changes that I think are meant to re-assure regulators across the world that they are strong regulators, they are experts and have access to the data that's needed."

In March, retirees from both AT&T and Lockheed filed federal lawsuits against the companies for entering the PRT deals. The lawsuits both argue that Athene is not safe.

Pensions & Investments reported that the AT&T purchase from the two Athene Holdings subsidiaries transferred $8.1 billion in U.S. pension plan liabilities and the responsibility of paying benefits to about 96,000 AT&T retirees and beneficiaries, and the two Lockheed Martin purchases in 2022 and 2021 transferred a combined $9.2 billion in U.S. plan liabilities and the responsibility of paying benefits to about 31,600 retirees and beneficiaries.

InsuranceNewsNet Senior Editor John Hilton covered business and other beats in more than 20 years of daily journalism. John may be reached at [email protected]. Follow him on Twitter @INNJohnH.

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InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. John may be reached at [email protected]. Follow him on Twitter @INNJohnH.