PBGC Wants Reporting on Lump-Sum Pension Cash-Outs and Annuity Purchases

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By James P. McElligott, Jr. and Maria P. Rasmussen

McGuireWoods LLP, Richmond, VA

With pension buyouts continuing apace, the Pension Benefit Guaranty Corporation (PBGC) has asked the Office of Management and Budget (OMB) for approval to modify the PBGC's 2015 premium payment forms to require reporting of certain "risk transfers" through "lump-sum window" and annuity purchases over a three-year period. During the past few years, billions of dollars of benefit obligations of pension plans of Fortune 500 companies and smaller employers have been eliminated through lump-sum distributions and purchases of annuity contracts issued by insurance companies.

Settlor and Fiduciary Issues Raised by Pension Buyouts

As noted in our WorkCite article of May 13, 2014 , a pension de-risking decision, the pension buyout of Verizon Communications, Inc., was challenged in a series of unsuccessful lawsuits. In Lee v. Verizon Communs., Inc., 58 EBC 2149, 2014 BL 102677 (N.D. Tex. Apr. 11, 2014), the court dismissed plaintiffs' ERISA challenge to the Verizon pension buyout, ruling that there was no failure to disclose, no breach of fiduciary duty and no violation of the exclusive benefit rule. The court stated:[P]laintiffs fundamentally disagree with the premise that an ERISA pension plan can, as here purchase an annuity to fund plan benefits and remove only some plan members, thereby eliminating the protections of ERISA and the PBGC for the removed members. * * * But at bottom, plaintiffs are disagreeing with the right of a settlor under ERISA, and such a disagreement must be addressed to Congress through requests for legislative changes to ERISA, not through litigation that complains of the decisions that ERISA empowers a plan sponsor as settlor to make.

Although the decision to "de-risk" may be a settlor function, implementation of a de-risking strategy such as an annuitization is a fiduciary act under ERISA. Interpretive Bulletin 95-1 of the Department of Labor, 29 C.F.R. §2509.95-1, provides guidance as to the fiduciary standards under ERISA when selecting an annuity provider for a defined benefit pension plan.

Impact of Pension Buyouts on the PBGC

The PBGC is acutely sensitive to the de-risking of defined benefit plans because such action may directly impact its financial health. As pension plan liabilities are shifted to plan participants who take lump-sum payments, or to insurance companies that issue annuity contracts, the PBGC's premium base shrinks. The PBGC indicated in its 2014 Annual Report released this past November that the deficit in the corporation's single-employer termination-insurance program is approximately $19.3 billion and that the deficit in the multiemployer program is approximately $42.4 billion.

The recent dramatic increases in PBGC premiums has been a factor in the de-risking calculation. The per-participant flat premium rate for plan years beginning in 2015 is $57 for single-employer plans (up from a 2014 rate of $49, a 2013 rate of $42, and a 2012 rate of $35). In 2016, this rate will be $67, nearly double the 2012 rate. The variable-rate premium per $1,000 of underfunding for single-employer plans rose from $9 in 2013, to $14 in 2014, and has continued to rise to $24 in 2015, and to $29 for 2016, more than tripling the 2013 rate.

Thus, reduction of the number of plan participants and reductions in plan underfunding can dramatically reduce the premiums paid to the PBGC. Although de-risking transactions reduce the PBGC's potential liabilities, companies who engage in pension buyouts are generally financially strong and much less likely to default on their pension obligations. Therefore, de-risking deprives the PBGC of premium revenue from pension plans unlikely to ever need the PBGC guarantee.

PBGC's Latest Information Request

In a  notice published Jan. 12, the PBGC submitted to the OMB for review draft forms for 2015 premium filings requiring reporting of certain risk transfer activity. Public comments must be submitted to the PBGC by Feb. 11, 2015, at the address specified in the notice. The draft 2015 Premium Payment Instructions forms may be found here.

Under the PBGC's current premium payment regulation, administrators of pension plans covered by Title IV of ERISA must file with the PBGC a payment form. The purpose of the form is to enable the PBGC to identify the plans for which premiums are paid, to verify whether such amounts are correct and to assist the agency in assessing the magnitude of its exposure in the event of plan terminations, and to keep the agency's insured plan inventory up to date. Forms are required to be filed electronically for a single premium payment year.

The 2015 revised form and filing procedures would require "after-the-fact" reporting of certain risk transfers through lump-sum windows and annuity purchases. The rationale provided by the PBGC is there is currently no available comprehensive, detailed and reliable source for information on risk transfers over a three-year period. Importantly, the information requested by the new form applies to more than a single premium year, and the corporation has stated that reasonable estimates may be reported instead of exact counts. The instructions also include clarifying information regarding a new lump-sum window definition.

In addition, the PBGC is changing certain premium declaration certification procedures offering the option for a plan to provide a telephone number for inclusion in the PBGC's "Search Plan List" on its website.

For further information, please contact either of the authors, Maria P. Rasmussen and James P. McElligott Jr., or any other member of McGuireWoods'  employee benefits team.

For more information, in the Tax Management Portfolios, see Kushner, 361 T.M., Reporting and Disclosure Under ERISA,  and in Tax Practice Series, see ¶5570, Reporting and Disclosure Requirements for Benefit Plans.

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