Plans Considering De-Risking Advised on Steps to Protect Participants, Themselves


As defined benefit plan de-risking continues to flourish, with sponsors either buying pension annuities or unloading their liabilities through lump-sum distributions, politicians, retirement experts and attorneys have raised questions about how to ensure that sponsors and participants come out ahead after the pension transfers have been made.

Pension plan sponsors have been de-risking their plans for decades, but the arena has been booming since 2012, when General Motors Co. led the way for other multibillion-dollar jumbo deals by offering a lump-sum distribution payment to 42,000 retirees and their beneficiaries and transferring its plan to Prudential Insurance Co. of America, with expectations that would save $26 billion in pension liabilities.

Hundreds of companies have followed in the wake of GM's action.

According to the LIMRA Secure Retirement Institute, pension buyout sales soared to $8.5 billion in 2014, up about 120 percent from $3.8 billion in 2013. There were 277 pension buyout contracts in 2014, up 28 percent from 217 the previous year, the report said.

The LIMRA report said that Prudential Financial Inc. got the lion's share of the buyouts, thanks to “jumbo” deals by Bristol-Myers Squibb Co. and Motorola Solutions Inc.

Protecting Retirees

Plan sponsors and regulators can take steps to protect people's retirement savings when de-risking, said Paul Secunda, a law professor and director of Marquette University Law School's Labor and Employment Law Program.

Sponsors and the Department of Labor should consider various principles to protect retirees before, during and after a risk-shifting transaction, Secunda said in offering Bloomberg BNA a preview of a paper he and Brendan S. Maher, associate professor of law at the University of Connecticut Law School, submitted for publication.

These factors include a “no worse-off policy,” regulatory safe harbors, changing the “safest available annuity” guidance to a “most protective” one and severely restricting lump-sum distributions to people who have already retired.

Principle #1: No Worse-Off Policy : Employees' or retirees' benefits should be no less after a risk-shifting transaction than they were beforehand, Secunda said. The principle is based on general principles of the Employee Retirement Income Security Act and in other areas “where the law says, if you're going to merge two plans together, you can't detrimentally impact the benefit rights the participants and beneficiaries have,” he said.

Principle #2: Regulatory Safe Harbors : The DOL should adopt regulatory safe harbors that would incentivize plan sponsors to consider internal de-risking strategies instead of external ones. Internal strategies include liability-driven investments, or hedging different types of investment strategies that make the risk with pension funding less volatile, he said.

Principle #3: Most Protective Annuities and Lump-Sum Disclosures : Because some sponsors are intent on settling their pension obligations through external strategies, for those doing so with annuity purchases, the regulatory guidance under Interpretive Bulletin 95-1 states that fiduciaries must choose the “safest available annuity provider,” unless it's in the best interest of the participants to do otherwise. Later DOL guidance, under 29 C.F.R. § 2509-1, limits the bulletin to defined benefit plans.

The challenge here, Secunda said, is that the bulletin is “much more based on the annuity itself, and its financial profile itself, or the risk it might face. So we want to be more participant-centered, as far as what we think IB 95-1 should do.”

For sponsors that choose lump-sum distributions, there should be more disclosures, Secunda said. The disclosure documents should show “what impact a lump-sum distribution might have on an individual, given that they're going to have to invest that money on their own and make it last for a long period of time, potentially. We think there have to be actual examples in the disclosures showing what the outcomes between staying in the pension plan versus taking the lump-sum buyout” would be, he said.

Principle #4: Lump-Sum Distribution Restrictions : Lump-sum distributions to people who have already retired should be “severely restricted,” Secunda said. For example, sponsors should be required to get consent for a lump-sum distribution from both the retiree and his or her spouse, he said. For retirees, “there should be some kind of showing they have an understanding—and a meaningful understanding—of the consequences of going the lump-sum route now that they're already in retirement,” he said.

The severe restriction recommendation borrows from the Securities and Exchange Commission's “suitability” rule, which requires a fiduciary, before offering a lump-sum distribution to a retiree, to consider the retiree's financial condition, as well as other relevant surrounding circumstances, to determine whether that's a suitable option for certain retirees, Secunda said.

Excerpted from a story that ran in Pension & Benefits Daily (03/06/2015).


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