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

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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.

Pension de-risking annuity purchase by Lincoln Electric

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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.

5th Circuit Denies Pension De-risking Challenge

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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?

IRS Sets Limits on Pension De-Risking

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In July 2015, the IRS announced new regulations (Notice 2015-49) limiting a company’s ability to de-risk its pension liabilities by making lump sum distributions to participants in pay status. While lump-sum payments may be a cost effective way of de-risking pension obligations, they may not be the best thing for retirees. Taking away the lump sum option from the defined benefits plan sponsor will likely result in more de-risking transfers via annuities.

Governor Malloy signs bill providing retiree protections

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.  Prior to the enactment of this ground-breaking legislation, annuity payments intended for retirement could be garnished by creditors in Connecticut. While the bill was pared down from that originally proposed to legislators, it is an important step in the right direction.  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. Public Act 15-167 takes effect on October 1, 2015.

“This bill is an important step in the right direction for retirees”

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Lawmakers in Connecticut have passed de-risking legislation that has been sent on to Governor Dannel Malloy for signature. Stone is quoted as saying “This bill is an important step in the right direction for retirees.” See “De-Risking Bill Sent to Connecticut Governor; N.Y. Measure Stalled in Insurance Committee”, by Sean Forbes. Reproduced with permission from BNA Pension & Benefits Reporter, 42 BPR 1008 (June 9, 2015). Copyright 2015 by The Bureau of National Affairs, Inc. (800-372-1033) http://www.bna.com.

CT Senate Passes H.B. 6772 – Pension De-Risking

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On Wednesday, June 3rd, 2015 the Connecticut Senate unanimously voted to pass H.B. 6772, providing creditor protections to retirees in pension de-risking transactions.  The bill will now be presented to Governor Malloy for signature.  ProtectSeniors.org, a non-profit group advocating for retirees in Connecticut and across the nation led the charge in passing this legislation. As special counsel to ProtectSeniors.org, Edward Stone Law worked with this retiree group in advocating for the passage of this important legislation.

Stone testifies before ERISA Advisory Council

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Edward Stone testified before the U.S. Department of Labor’s Advisory Council on Employee Welfare and Pension Benefit Plans (ERISA Advisory Council) on May 28, 2015.  Stone testified on the need for disclosures to retirees both pre and post pension risk transfers. Recommended disclosures prior to pension risk transfer included:

  • A detailed disclosure statement that contains information regarding the loss of federal ERISA protections, including Pension Benefit Guaranty Corporation (“PBGC”) protection and the applicable state laws that will govern their future annuity payments;
  • The amount, scope and conditions precedent for state guaranty association coverage in the event of an insurance company insolvency;
  • The extent to which annuity payments become subject to creditor claims or avoidance actions by bankruptcy trustees;
  • Disclosure related to any changes that might result in the tax treatment of retiree benefits under an annuity contract;
  • Lump sum options and conditions, if any;
  • Detailed information on the group annuity contract structure, including a schedule of all costs and expenses paid in connection with the transaction;
  • A copy of any fairness opinions or solvency analysis done in connection with the choice of annuity or other benefit provider.

Stone’s recommendation on post transfer disclosures to retirees included requiring all annuity providers, or subsequent benefit providers to provide impacted retirees with at least the following mandatory annual disclosures:

  • Funding levels of all assets relative to expected liabilities under the assumed pension benefit schedules;
  • Investment performance summary by asset class;
  • Investment performance detail by asset class;
  • Expenses associated with any group annuity contract; and
  • Material changes in actuarial assumptions, if any.

 

Once Again, “Don’t Put All Your Eggs in One Basket”

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These issues keep coming up again, and again.  Are annuities safe?  Should you lock up all your money in one single annuity? As Dennis Beaver, columnist for the Hanford Sentinel, and a Bakersfield, California attorney told his readers in a recent column “determining if an annuity is right for you requires a careful financial analysis conducted by a fee only financial planner who acts as your fiduciary….”.  Edward Stone is quoted extensively in Beaver’s recent article, offering up the Executive Life Insurance Company of New York liquidation as an example of why you can’t count on guaranty associations to pick up the pieces if your insurance company fails. “While there are State Guarantee Associations which offer some protection. Coverage amounts vary from state to state and range from $100,000 to $500,000 per individual per lifetime. This means that if the doctor put his $800,000 IRA into an annuity, and that company bit the dust, he could face significant disruptions and reductions in his benefit payments.”

It just can’t hurt to say it again.  No company is too big to fail, and contrary to the assertions of some sales people out there, nothing is risk free and annuities are no exception.