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New Hampshire Ups Guaranty Association Coverage

New Hampshire has increased guaranty association coverage for annuity contracts  from $100,000 to $250,000.  While this is still $250,000 less than the coverage offered by New York, Connecticut, New Jersey and Washington, it puts New Hampshire in line with the coverage offered by thirty-seven other states.

This increase in coverage is very important to retirees in pension de-risking transactions. Typically, in the event of an insurance company or annuity provider insolvency, a retiree would be protected by the laws of the state he/she resides in at the time the insurance company is declared to be insolvent or impaired.  Retirees may unwittingly divest themselves of guaranty association coverage by moving after the transfer of their pension obligations. A retiree living in New York with $500,000 of potential coverage would find himself or herself with just $250,000 of coverage after relocating to New Hampshire.

ProtectSeniors.org Op-ed by Chairman Bill Jones

An excellent op-ed was published by Fort Worth’s Star-Telegram in late October, written by C. William Jones, the Chairman of ProtectSeniors.org.  The piece focused on the pension de-risking crisis facing today’s retirees.  Plano, Texas based J.C. Penney was the latest company to join the de-risking bandwagon, offering both lump-sum buyouts and transferring it pension obligations to 43,000 retirees buy purchasing a group annuity contract.

Cleveland Plain Dealer – Pension De-Risking

Edward Stone’s guest column – reprinted below – appeared in the Sunday, October 4, 2015 edition of Cleveland’s “The Plain Dealer.”

“Euclid-based Lincoln Electric Co. has become the latest company to join the pension de-risking bandwagon. By offloading its retirees’ pension obligations through the purchase of a group annuity contract from The Principal Financial Group, as of Nov, 1, 2015, Lincoln Electric will have no further obligations to 1,900 former employees.

Once Lincoln Electric chose to purchase a group annuity contract and transfer its pension obligations, its retirees lost all the uniform federal law protections intended by Congress under the Employee Retirement Income Security Act (ERISA). These protections include: ready access to the federal court system; uniform protection from creditors; and mandatory disclosures. Plus, all defined benefit plans that fall under ERISA are backstopped by the federal Pension Benefit Guaranty Corp. (PBGC), which provides annual payments to pensioners that increase based on age.

Lincoln Electric retirees are not the only retirees adrift in the pension de-risking boat. Verizon, General Motors, and Kimberly-Clark are among others in the new fraternity of companies who abandoned their loyal retirees so they could reduce their corporate exposure to volatility.

Why should retirees worry about pension de-risking?

First, it is unclear that the insurance industry has the long-term financial capacity to meet these new obligations to so many retirees. As the 2008 fiscal crisis demonstrated, no company is “too big to fail.” Certainly not Bear Stearns, Lehman Brothers or Merrill Lynch. Earlier this summer, the International Monetary Fund and the Organization for Economic Cooperation and Development both warned that pension de-risking and other pension trends might threaten the stability of the U.S. financial system.

While it’s hard to get accurate data about the breadth, scope and concentration risk associated with de-risking, at least one industry spokesperson estimated that more than $250 billion in pension risk transfers have already taken place in the United States, Canada and the United Kingdom since 2007. That’s a lot of risk!

The Internal Revenue Service recently shut down the most popular method of pension de-risking by banning lump-sum distributions to retirees, forcing companies to turn to the use of insurance industry annuity products to offload their pension obligations. This is what Lincoln Electric has done.

Second, if the insurance company managing your pension assets goes belly up, beware of insurance insolvency laws. Insurance companies cannot file for bankruptcy like most other businesses.

When an insurer bites the dust, it becomes subject to state insolvency laws, which are arcane, nonuniform and, in some cases, inefficient. Liquidation plans usually trigger the obligations of the individual state guaranty associations, most of which are unfunded or underfunded. In addition, these state guaranty associations provide “coverage” in ways that might not make sense to the average Joe.

That’s exactly what happened when the Executive Life Insurance Co. of New Yorkliquidated after 22 years of failed “rehabilitation.”

Multistate insolvencies are highly complex and sometimes opaque. They require the coordination of all of the relevant guaranty associations, many of which offer coverage amounts that range from $100,000 per individual per lifetime to $500,000 per individual per lifetime.

Ohio’s life insurance guaranty association offers only $250,000 of “lifetime” protection to annuitants, which is in sharp contrast to the annual coverage provided to pensioners by the PBGC. This lifetime coverage limit is also inclusive of any individual’s life insurance policies.

The unilateral decision by corporate America to shift the risk associated with earned benefits onto the shoulders of vulnerable older Americans is simply wrong. Taking away uniform protections and subjecting retirees to the vagaries of state law – where the business of insurance is regulated – is discriminatory and unfair.

Among the other numerous unacknowledged dangers of de-risking is that, unlike pensions, insurance annuities may be subject to creditor claims and bankruptcy.

It’s why Ohio retirees need to tell their state elected officials about the new dangers of pension de-risking and the need to immediately put legal protections in place without delay.

The nonprofit ProtectSeniors.Org has already made headway in Connecticut and New York to protect retirees in those states from creditor claims against their newly de-risked pension assets. Efforts to protect more retirees from discrimination are underway across the country.

Pension de-risking is a true and growing retiree crisis in America. Ohio retirees and their legislators should take action before it is too late.

Edward Stone, who lives in Connecticut, is special counsel to ProtectSeniors.Org, a nonprofit retiree advocacy organization.”

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J.C . Penney Announces Pension De-Risking Annuity Purchase

Today,  J.C. Penney announced that it would continue its pension de-risking efforts by purchasing a group annuity contract from The Prudential Insurance Company of America. While exact numbers of retirees affected and the terms of the agreement have yet to be released, it appears that this pension de-risking transfer is an annuity “lift-out” and the company’s defined benefit plan will not be terminated but the number of participants in the plan will be reduced by 25-35%. The annuity purchase is expected to close in December 2015.  Last month J.C. Penney offered lump-sum payments to retirees and the company reported that approximately 12,000 retirees elected to receive these lump-sum payments.

As we predicted, more companies are seeking to enter into pension de-risking annuity transfers and the need for state legislation protecting retirees is even more important.  Connecticut’s ground-breaking legislation,  Public Law 15-167, An Act Extending Creditor Protection to Amounts Payable to a Participant of or Beneficiary Under an Annuity Purchased to Fund Employee or Retiree Retirement Benefits, went into effect yesterday.

Law Protecting Connecticut Retirees takes effect today!

Governor Dannel P. Malloy (D) signed into law Public Act 15-167 on July 2, 2015 providing creditor protections to retirees in pension de-risking transfers.  Public Act 15-167 takes effect today. Prior to the enactment of this ground-breaking legislation, annuity payments intended for retirement could be garnished by creditors in Connecticut. Edward Stone Law, on behalf of ProtectSeniors.org, a nonprofit retiree advocacy organization, and legislative sponsor Rep. Robert Megna (D-97), Chair of the Connecticut State Insurance Real Estate Committee and co-sponsors Rep. Livvy R. Floren (R-149), Rep. Louis P. Esposito , Jr. (D-116) and Senator Henri Martin (R-31) worked to pass this legislation in record time.

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Pension De-Risking Continues

Companies continue to de-risk their pension plans at a rapid pace.  J.C. Penney Co., based in Plano, Texas offered 31,000 retirees a lump sum buyout offer which expires today.  This offer follows an earlier lump sum buyout offer in 2012 that 25,000 retirees elected to take. While the I.R.S. restricted lump sum buyouts with new regulations issued in July of this year, J.C. Penney was permitted to move forward as they apparently met one of the exceptions provided for in I.R.S. Notice 2015-49.  This may not be the last pension de-risking move for J.C. Penney Co., and the move may include the purchase of a group annuity contract.  Joey Thomas, a spokesman for J.C. Penney is quoted in Pensions & Investments as saying “We monitor the annuitization market on an ongoing basis to evaluate if there are opportunities to further derisk the pension plan in a cost-efficient manner.” In August, E.W. Scripps Co. based in Cincinnati offered the option of a lump sum or immediate annuity to 4,300 retirees.  Company funds were not used to make the lump sum distributions, and the Scripps defined benefit plan (DBP) funding ratio remains at 80%. We’ve said this before, but we will say it again – now that the I.R.S. has limited lump sum distributions to retirees we expect to see more pension risk transfers via the purchase of group annuity contracts. This makes pension de-risking legislation protecting retirees all the more important. Connecticut’s new law, Public Law  15-167, An Act Extending Creditor Protection to Amounts Payable to a Participant of or Beneficiary Under an Annuity Purchased to Fund Employee or Retiree Retirement Benefits, goes into effect on October 1, 2015.

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Petition for pension de-risking rehearing filed in Lee v. Verizon

Plaintiffs’ have filed a petition for re-hearing with the 5th Circuit in Lee v. Verizon Communs., Inc., 2015 U.S. App. LEXIS 14588 (5th Cir. Tex. Aug. 17, 2015), asking that the court re-visit its decision and preserving their right to appeal. Hopefully the 5th Circuit will realize that the risks associated with kicking retirees to the curb are just as important as managing pension volatility.

Wall Street Journal reports more companies to offer pension buyouts

The Wall Street Journal’s CFO Journal reported in “Tax  Policies Spur Companies to Offer Pension Buy-outs” that in the wake of the IRS’s recent decision to continue using its current mortality tables and new regulations limiting lump-sum buyouts,  Newell Rubbermaid and E.W. Scripps will offer lump-sum buyouts to thousands of former employees, with E.W. Scripps also offering an annuity option. Like many companies, E.W. Scripps froze their defined benefit plan several years ago, but will carry liabilities on its books as members retire and receive pension benefits.  Lump-sum distributions are not always the best option for retirees – many would do better with a guaranteed stream of income for life.

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Pension de-risking annuity purchase by Lincoln Electric

The most recent company to jump on the pension de-risking bandwagon is Lincoln Electric Company who announced that it was de-risking over $900 million in pension obligations to 1900 retirees by transferring its pension obligations to The Principal Financial Group by purchasing a group annuity contract to cover those pension obligations. While pension de-risking offers advantages to plan sponsors, de-risking comes at a cost to retirees, who lose ERISA and PBGC protections. Hopefully, the state of Ohio will follow Connecticut’s lead and pass legislation at the state level to protect retirees and their families from risks associated with pension de-risking.

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5th Circuit Denies Pension De-risking Challenge

In Lee v. Verizon Communs., Inc., 2015 U.S. App. LEXIS 14588 (5th Cir. Tex. Aug. 17, 2015), a case closely watched by defined benefit plan (DBP) sponsors, the insurance industry, and ProtectSeniors.org, a retiree advocacy group, a three judge panel rejected the plaintiffs’ challenges to Verizon’s decision to de-risk its pension obligations by removing over 41,000 retirees from the DBP and purchasing a group annuity contract to cover their pension payments. The 5th Circuit concluded that Verizon’s decision to amend its DBP to permit the annuity purchase was not a fiduciary decision and did not require that the annuity remain an asset of the DBP. Once Verizon had purchased the group annuity contract, the 41,000 retirees who were “lifted out” of the DBP no longer had any of the protections offered by ERISA or the Pension Benefit Guaranty Corporation (PBGC). While pension de-risking is advantageous to plan sponsors, it has serious risks to plan participants, retirees, and their families, some of which may not be felt for years to come.  Will it take the collapse of another life insurer for folks to care?