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What is Pension De-Risking?
Pension de-risking in its most general form is any kind of action taken by a defined benefit plan (DBP) sponsor to reduce the plan sponsor’s exposure to its pension liabilities. Pension de-risking can involve:
- Freezing pension benefits to some or all of the plan participants.
- Changing the pension plan investment strategy.
- Offering lump sums buyouts to some or all plan participants.
- Annuity “buy-ins” where a plan sponsor purchases one or more annuity contracts to cover pension obligations with the plan sponsor remaining as the owner of the annuity contract(s).
- Annuity “buy-outs” where the plan sponsor transfers all of its pension liabilities to an insurance company or other annuity provider by purchasing a group annuity contract and terminates its defined benefit plan.
- Annuity “lift-outs” where the defined benefit plan sponsor transfers some of its pension liabilities to an insurance company or other annuity provider by moving some, but not all of the plan participants out of the defined benefit plan. When using this pension de-risking strategy the defined benefit plan sponsor does not terminate the plan.
In 2012 General Motors and Verizon Communications both entered into what are known as “pension de-risking” transactions by replacing all or part of their pension obligations to groups of former employees with annuities issued under group annuity contracts. Bristol-Myers Squibb followed suit in 2014, transferring $1.4 billion in pension obligations to Prudential. In 2015 Kimberly-Clark, Lincoln Electric Company, and J.C. Penney all purchased group annuity contracts to settle pension obligations. In late 2016, Farmington, Connecticut based United Technologies (UTC) transferred $7.75 billion of outstanding pension obligations in a pension de-risking transfer. United Technologies is the corporate umbrella for a long list of well-known brands: Otis Elevator, Carrier Corp, Pratt & Whitney, Hamilton Sunstrand, Kidde Corp, Chubb Security, B.F. Goodrich, UTC Aerospace Systems, Sikorsky Aircraft, and many more. More companies have followed suit in 2017, including Memphis based International Paper, and the New York Times Co.
These pension de-risking transactions involving the purchase of group annuity contracts move the retirees beyond the comprehensive and uniform protections intended by Congress under ERISA and into various non-uniform state statutory and common law regimes offering varying and sometimes inferior protections to retirees.
As special counsel to the Association of BellTel Retirees and Protect Seniors.org, Edward Stone Law is working to introduce state legislation addressing pension de-risking in New York, Connecticut, Massachusetts, Virginia and Pennsylvania and to amend federal laws to provide protections for retirees in pension de-risking transactions.
If you are a retiree organization facing a potential pension de-risking transaction we can assist you in evaluating the risks to your members and assist in evaluating alternatives and available options.
New Protections in Connecticut
In 2015 ground breaking legislation was passed in Connecticut providing protections to retirees in pension de-risking transfers. On June 3, 2015 the Connecticut legislature unanimously passed H.B. 6772 providing creditor protections to retirees in pension de-risking transfers. On July 2, 2015 Governor Dannel P. Malloy (D) signed Public Act 15-167 into law restoring creditor protections to Connecticut retirees impacted by pension de-risking transfers. Without this legislation, creditors were able to garnish annuity payments designed for retirement. Follow up legislation was introduced in 2016 but despite overwhelming support from the Insurance and Real Estate Committee this proposed bill was not brought to the floor of the House for a vote.
In January, 2017 Connecticut State Senator Carlo Leone (D – 27) introduced Proposed Bill No. 493 “AN ACT CONCERNING THE PURCHASE OF AN ANNUITY TO FUND PENSION AND RETIREMENT BENEFITS”. This proposed bill requires an insurance company to provide certain disclosure to employees and retirees impacted by pension de-risking transfers involving the purchase of a group annuity contract to fund retirement benefits and would limit subsequent transfers of those annuity contracts. A public hearing was held on February 16, 2017 and the bill has drafted and referred to the Joint Committee on Insurance and Real Estate. Senate Bill No. 493 is available here. Edward Stone Law will be working with ProtectSeniors.org to educate legislators and retirees about the benefits of this important legislation.
I.R.S. Regulations regarding Lump Sum De-risking
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. The recent limitations placed on lump-sum buyouts will likely result in more pension de-risking via annuity buy-outs and lift-outs.