Earlier this year two companies announced the purchase of group annuity contracts from Pacific Life Insurance Company for the purpose of pension de-risking. In a $370 million transaction, S&P Global transferred its obligations to 4,600 retirees to Pacific Life. Lennox International, the heating and cooling company transferred $100 million in pension obligations to Pacific Life Insurance Company. In 2016, Lennox offered lump-sum buyouts to vested participants. Few details were released about either of the Pacific Life transactions.
Dana Incorporated, the Maumee, Ohio based maker of power-conveyance and energy management solutions for vehicles and machinery has now transferred all liabilities associated with the Dana Retirement Plan, by purchasing group annuity contracts for the remaining plan participants. The company contributed approximately $62 million in cash to the Retirement Plan in order to facilitate the purchase of two group annuity contracts. One contract, purchased from Athene Annuity and Life Company (a subsidiary of Athene Holding Ltd.) will cover all but the New York retirees. New York retirees will receive their pension benefits in the form of annuity payments from Companion Life Insurance Company, a subsidiary of United of Omaha Life Insurance Company. Dana’s retirees will begin receiving payments from the two insurance companies in October, 2019.
Avery Dennison, the global manufacturer and distributor of adhesive materials, apparel branding labels, and specialty medical products headquartered in Glendale, California transferred approximately $750 million of its pension obligations to American General Life Insurance Co. in May 2019. This pension de-risking transfer affects about 8,500 retirees. In July 2018, Avery Dennison terminated its US defined benefit plan, and subsequently contributed $200 million to the plan before making lump-sum buyouts available to certain plan participants, reducing its pension liabilities by about $152 million. In March 2019, the company contributed $7 million to the DBP to cover the costs association with the pension de-risking transfer.
According to the 2019 Pension Risk Transfer Poll sponsored by MetLife, most companies plan to rid themselves of their pension liabilities in the future. Pension de-risking transfers topped $26 Billion in 2018, up 14% from 2017. Pension de-risking since 2012 exceeds $125 Billion. 2019 is on-track to be a big year for pension de-risking. According to LIMRA Secure Retirement Institute pension de-risking transfers (what they term “buy-out” sales) were $4.75 Billion in the 1st Quarter of 2019.
Senator Andrew Gounardes (D. 22nd) has sponsored a “same as” bill – S4864 to accompany A5818 – “AN ACT to amend the insurance law, in relation to providing protection to certain retirees from pension de-risking transactions; and to amend the civil practice law and rules, in relation to statutorily exempt payments” sponsored by Assemblyman Peter Abbate. This bill has been referred to the Insurance Committee. The introduction of the “same as” bill in the New York Senate is very important. In New York State, both the Senate and Assembly must pass a bill before the Governor can sign the bill into law.
Pension de-risking through the purchase of a group annuity contract is a concern to retirees because retirees lose all of the uniform protections intended by Congress under ERISA and their rights become subject to non-uniform state laws. Enactment of legislation at the state level is needed to replace these protections. NY’s proposed legislation will provide those protections to New York retirees impacted by pension de-risking transfers. This legislation will provide basic financial disclosures, protections of annuity benefits from creditors, and reasonable restrictions on subsequent transfers.
Download text of New York Senate Bill 4864.
Download text of New York Assembly Bill A5818.
Pension de-risking protections have already been enacted in Connecticut and Virginia. Read more about pension de-risking here and here.
The IRS released a new notice earlier this month, which will allow defined benefit plan (DBP) sponsors to once again offer lump-sum buyouts to retirees who are receiving pension benefits. This practice of lump-sum buyouts was effectively halted in 2015 with the release of IRS Notice 2015-49. Prior to the 2015 IRS Notice, DBP’s regularly offered lump-sum buyouts to retirees in an effort to reduce their pension liabilities. Lump-sum buyout’s are lucrative for the DBP’s but are often detrimental to retirees. As stated in Forbes: “The idea of an employer-sponsored defined benefit pension plan is that you (and your spouse) get guaranteed payouts for life. As the plans became a drag on corporate balance sheets, companies started shedding pension liabilities by offering participants the option of taking a lump-sum buyout (cash) or transferring their pension to an insurer who would continue the lifetime payments. For retirees who say yes to the lump-sum offers, it wipes out federal protections of ERISA and turns lifetime retirement income into a one-time chunk that can easily be outlived.”
IRS Notice 2019-18 supersedes IRS Notice 2015-49.
In its 2018 10-K, Maryland based chemical conglomerate, W.R. Grace & Co. reported that it has purchased a group annuity contract from Prudential Life Insurance Co. of America, transferring $117.4 million in pension liabilities. W.R. Grace recognized a $1.0 million gain on that transaction. Earlier in 2018, W.R. Grace’s U.S. pension plans paid $42.2 million in lump sum distributions to retirees not yet in pay status reducing its pension obligations by $43.5 million and resulted in a $1.3 million gain. W.R. Grace’s defined benefit plan closed to new participants in 2017. The company now sponsors a defined contribution plan for U.S. employees, currently contributing an amount equal to 100% of employee contributions, up to 6% of an individual employee’s salary or wages.
In its recent SEC filing, paint giant Sherwin Williams disclosed that it had distributed lump sums to some of its pension plan participants in late 2018, and intended to continue its pension de-risking in 2019 via more lump-sum payments or the purchase of a group annuity contract. At the end of 2017, Sherwin William’s three defined benefit plans were actually over-funded, with assets of $1.19 billion, with projected benefit obligations of $916.2 million. After additional lump-sum payments in 2019 and the purchase of an annuity contract, Sherwin William’s plans to use the remaining cash to fund future contributions to a defined contribution pension plan that will replace its current defined benefit plans. Unlike a defined benefit plan, a defined contribution plan does not promise or guarantee a specific amount of benefits at retirement. A contribution plan invests either or both of the employer and employee contributions in a retirement account on the employee’s behalf, with the employee to receive the balance upon retirement.
New York Assemblyman Peter Abbate has sponsored 2019 legislation to protect retirees in pension de-risking transfers. Assembly Bill A5818 – “AN ACT to amend the insurance law, in relation to providing protection to certain retirees from pension de-risking transactions; and to amend the civil practice law and rules, in relation to statutorily exempt payments” has been referred to the Insurance Committee. This bill was introduced on February 19, 2019, and is the first step in gaining much needed protections for retirees impacted by pension de-risking transfers.
Pension de-risking through the purchase of a group annuity contract is a concern to retirees because retirees lose all of the uniform protections intended by Congress under ERISA and their rights become subject to non-uniform state laws. Enactment of legislation at the state level is needed to replace these protections. NY’s proposed legislation, A5818, will provide those protections to New York retirees impacted by pension de-risking transfers. This legislation will provide basic financial disclosures, protections of annuity benefits from creditors, and reasonable restrictions on subsequent transfers.
Pension de-risking protections have already been enacted in Connecticut and Virginia. Read more about pension de-risking here and here.
Check out Edward Stone’s letter to the editor, appearing in the January 25, 2019 online edition of Crain’s New York Business, commenting upon the article “Trump deregulation binge puts state agencies on the spot”. Following up on Crain’s assertion that the New Jersey Department of Banking and Insurance is over matched when it comes to overseeing “complex financial behemoths like Prudential” Edward Stone points out that: “we may not yet know what happens when an insurer the size of a Prudential or MetLife isn’t policed adequately, we know for sure that the seeds of the next financial meltdown are being sown with deliberate attempts to avoid transparency and accountability at the expense of retirees and their families.”
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© Edward S. Stone 2014-2020.
Photos courtesy of David Lasnick.