Pension Risk Transfer: Annuity Buy-In or Buy-Out

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What is the difference between a pension risk transfer via an annuity “buy-in” or “buy-out?”

With an annuity “buy-in” a plan sponsor purchases one or more group annuity contracts to cover pension obligations with the plan sponsor remaining responsible for making payment to the plan participants.

With an annuity “buy-out” the defined benefit plan sponsor transfers all of its pension liabilities to an insurance company by purchasing a group annuity contract and terminates its defined benefit plan.  A variation on the annuity “buy-out” is the “lift-out” where the plan sponsor purchases an annuity contract to cover the benefits of certain retirees, but other retirees remain covered by the pension plan and the plan is not terminated.

In August 2019, the LIMRA Secure Retirement Institute reported that “buy-ins” totaled more than $880 million in the second quarter of 2019.  “Buy-outs” for the same period  surpassed $4.7 billion.

Baxter International De-Risks Pensions

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Chicago based Baxter International has purchased a group annuity contract from Prudential Insurance.  With this move, Baxter transferred its pension liabilities of approximately $2.4Billion, covering 17,200 former employees to Prudential. This pension de-risking transaction only affects former employees who have reached “pay status.” The transaction was expected to close on October 11, 2019.

MetLife Settles with Massachusetts Over Unpaid Pensions

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In late 2017, MetLife announced that it had lost track of some retirees.  MetLife had assumed the responsibility of paying these retirees in a pension risk transfers done years ago, and disclosed that it followed a policy of trying to reach beneficiaries just twice. Once when they approached age 65, and again 5 1/2 years later when federal law required them to begin taking benefits.  MetLife was charged with fraud in June 2018 by the Commonwealth of Massachusetts. The lawsuit was settled in late December with MetLife paying a $1 Million fine to Massachusetts.  MetLife is making payment to the formerly “lost” annuitants with interest.

Lawsuit Filed in the Wake of MetLife’s Failure to Keep Track of Retirees

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Earlier this year we reported on MetLife’s failure to pay retirees to whom it owed benefits resulting from pension de-risking transfers.  A lawsuit has now been filed against MetLife by Edward Roycroft, a former Martindale-Hubbell employee who retired in 1999.  Roycroft was supposed to receive his benefits in 1999, but MetLife did not pay him his benefits until 2013.  Styled as a class action, the lawsuit includes claims of conversion and unjust enrichment and alleges damages to the class in excess of $500 million. The case is styled as Roycroft v. MetLife, Inc., 18-cv-05481 (S.D.N.Y.).  The Commonwealth of Massachusetts, Securities Division, has also charged MetLife with fraud for making materially misleading statements in public filings causing harm to investors.

New Proposed Pension De-Risking Bill in Connecticut

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Connecticut State Senator Carlo Leone (D – 27) has 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 annual disclosures 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. Edward Stone Law will be working with ProtectSeniors.org to educate legislators and retirees about the benefits of this important legislation. For more information please visit our website at www.edwardstonelaw.com or call (203) 504-8425.

PPG Industries Enters the Pension De-risking Arena

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PPG Industries, a Fortune 200 global manufacturer of paints, coatings and optical products has entered into agreements with Metropolitan Life Insurance Company and Massachusetts Mutual Life Insurance Company to provide annuity benefits to 13,400 retirees removed from PPG’s defined benefit pension plans.  In what appear to be  annuity “lift-out’s” PPG has purchased group annuity contracts from MetLife and MassMutual to cover pension obligations of approximately $1.6 billion.  These pension de-risking transfers involve both salaried and non-union hourly employees. Annuity “lift-out’s” occur when a defined benefit plan sponsor amends its defined benefit plan (a “settlor” or administrative decision, not a fiduciary decision), does not terminate the defined benefit plan, but rather moves selected employees or retirees out of the defined benefit plan. De-risked plan participants become “certificate holders” under a group annuity contract they do not own.  These retirees lose all of the uniform benefits intended by Congress under ERISA and become subject to non-uniform state laws.  We expect to see many similar pension de-risking transactions in 2016. One of our clients, ProtectSeniors.org is actively working to protect retirees’ rights in pension de-risking transactions.  For more information, please contact us at (203) 504-8425 or eddie@edwardstonelaw.com.

New Hampshire Ups Guaranty Association Coverage

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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.

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

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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.

Pension De-Risking Continues

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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.

U.S. Escapes Liability for Executive Life Annuity

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As the last of the Executive Life cases seem to be winding their way through the court system, the U.S. government escaped liability in Nutt et al v. United States, No. 14-CV-282, 2015 WL 3525191 (Fed. Cl. June 4, 2015)  for a contract it purchased in settlement of a wrongful death claim in 1983, where a man was killed by an intoxicated Army employee driving an Army vehicle. Distinguishing what appeared to be strong precedent for holding the U.S. liable for its obligations under the annuity contract it purchased from Executive Life, the U.S. Federal Court of Claims found that the Massie case did not apply as that case involved the Military Claims Act, 10 U.S.C. Section 2731, et seq. rather than the Federal Claims Tort Act. Judge Braden also emphasized that the terms of the settlement language did not evidence the government’s intention to guarantee the annuity payments.