Edward Stone’s guest column – reprinted below – appeared in the Sunday, October 4, 2015 edition of Cleveland’s “The Plain Dealer.”
“Euclid-based Lincoln Electric Co. has become the latest company to join the pension de-risking bandwagon. By offloading its retirees’ pension obligations through the purchase of a group annuity contract from The Principal Financial Group, as of Nov, 1, 2015, Lincoln Electric will have no further obligations to 1,900 former employees.
Once Lincoln Electric chose to purchase a group annuity contract and transfer its pension obligations, its retirees lost all the uniform federal law protections intended by Congress under the Employee Retirement Income Security Act (ERISA). These protections include: ready access to the federal court system; uniform protection from creditors; and mandatory disclosures. Plus, all defined benefit plans that fall under ERISA are backstopped by the federal Pension Benefit Guaranty Corp. (PBGC), which provides annual payments to pensioners that increase based on age.
Lincoln Electric retirees are not the only retirees adrift in the pension de-risking boat. Verizon, General Motors, and Kimberly-Clark are among others in the new fraternity of companies who abandoned their loyal retirees so they could reduce their corporate exposure to volatility.
Why should retirees worry about pension de-risking?
First, it is unclear that the insurance industry has the long-term financial capacity to meet these new obligations to so many retirees. As the 2008 fiscal crisis demonstrated, no company is “too big to fail.” Certainly not Bear Stearns, Lehman Brothers or Merrill Lynch. Earlier this summer, the International Monetary Fund and the Organization for Economic Cooperation and Development both warned that pension de-risking and other pension trends might threaten the stability of the U.S. financial system.
While it’s hard to get accurate data about the breadth, scope and concentration risk associated with de-risking, at least one industry spokesperson estimated that more than $250 billion in pension risk transfers have already taken place in the United States, Canada and the United Kingdom since 2007. That’s a lot of risk!
The Internal Revenue Service recently shut down the most popular method of pension de-risking by banning lump-sum distributions to retirees, forcing companies to turn to the use of insurance industry annuity products to offload their pension obligations. This is what Lincoln Electric has done.
Second, if the insurance company managing your pension assets goes belly up, beware of insurance insolvency laws. Insurance companies cannot file for bankruptcy like most other businesses.
When an insurer bites the dust, it becomes subject to state insolvency laws, which are arcane, nonuniform and, in some cases, inefficient. Liquidation plans usually trigger the obligations of the individual state guaranty associations, most of which are unfunded or underfunded. In addition, these state guaranty associations provide “coverage” in ways that might not make sense to the average Joe.
That’s exactly what happened when the Executive Life Insurance Co. of New Yorkliquidated after 22 years of failed “rehabilitation.”
Multistate insolvencies are highly complex and sometimes opaque. They require the coordination of all of the relevant guaranty associations, many of which offer coverage amounts that range from $100,000 per individual per lifetime to $500,000 per individual per lifetime.
Ohio’s life insurance guaranty association offers only $250,000 of “lifetime” protection to annuitants, which is in sharp contrast to the annual coverage provided to pensioners by the PBGC. This lifetime coverage limit is also inclusive of any individual’s life insurance policies.
The unilateral decision by corporate America to shift the risk associated with earned benefits onto the shoulders of vulnerable older Americans is simply wrong. Taking away uniform protections and subjecting retirees to the vagaries of state law – where the business of insurance is regulated – is discriminatory and unfair.
Among the other numerous unacknowledged dangers of de-risking is that, unlike pensions, insurance annuities may be subject to creditor claims and bankruptcy.
It’s why Ohio retirees need to tell their state elected officials about the new dangers of pension de-risking and the need to immediately put legal protections in place without delay.
The nonprofit ProtectSeniors.Org has already made headway in Connecticut and New York to protect retirees in those states from creditor claims against their newly de-risked pension assets. Efforts to protect more retirees from discrimination are underway across the country.
Pension de-risking is a true and growing retiree crisis in America. Ohio retirees and their legislators should take action before it is too late.
Edward Stone, who lives in Connecticut, is special counsel to ProtectSeniors.Org, a nonprofit retiree advocacy organization.”