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.
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.
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.
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.
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?
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.
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.
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.
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.
Two Edward Stone Law cases were featured prominently in today’s Wall Street Journal – “Firms Help Settlement Holders Cash Out Payments Meant to Last a Lifetime”. What the WSJ article fails to describe is the high pressure predatory sales tactics used to raid large structured settlement annuities that were intended to last a lifetime. The Taylor and Lafontant cases highlight just how far the factoring industry has fallen in recent years and how important it is to obtain independent professional advice. Instead of providing needed liquidity, as advertised, bad actors target large structured settlement annuities and shop for courts and judges they know will rubber stamp petitions that don’t meet the best interest standard required under state and federal law. If a slick annuity salesperson tries to convince you to fake your relocation to another state with promises of “cash now”, think twice. You could lose your identity (true story) and wind up destitute (truer still). If you or someone you know has been victimized by structured settlement fraud, Edward Stone Law will evaluate your transaction at no charge, and let you know if help if available. You can reach us via email at email@example.com or via telephone at (203) 504-8425.