Defined benefit plan sponsors have been quietly working to reduce corporate liabilities by moving retirees out of defined benefit plans and into group annuity contracts. This practice, known to retirees as “pension stripping” takes away the uniform protections intended by Congress under the Employee Retirement Income Security Act (ERISA) and dumps the retirees into the state insurance systems. Ironically, healthy defined benefit plans are those most likely to be subjected to pension stripping. Purchasing a group annuity comes at a significant cost to the plan sponsor but has the benefit of permanently removing the liability from the corporation’s books. In the past few years the industry has seen pension de-risking transfers by Verizon and General Motors that affected over 150,000 retirees. The Verizon transaction was unique in that it did not involve a termination of the defined benefit plan – 41,000 management employees were selectively removed from the defined benefit plan and placed into a group annuity contract with Prudential.
Unions approaching the collective bargaining table should keep the many issues surrounding pension de-risking in mind. De-risking transfers where defined benefits are replaced with a group annuity contract may create new risks for retirees that need to be addressed at the bargaining table. A group annuity contract is governed by state law and all of the protections offered under ERISA including financial disclosures, fiduciary standards, uniform protection from creditors and bankruptcy trustees and uniform coverage offered by the federal Pension Benefit Guaranty Corporation (PBGC) no longer exist post transfer.
Legislation is pending in New York that would help replace protections to retirees who are negatively impacted by pension stripping transactions and is expected to be introduced during the next legislative session in Connecticut and a number of other states. New York’s Senate Bill is S 6150 and was sponsored by Senator Tony Avella of Queens. The bill is currently before the Insurance Committee. A companion bill was introduced in the New York Assembly by Assemblyman Peter Abbate of Brooklyn. Thus far, the proposed legislation in New York and Connecticut which would bring more uniformity, transparency and accountability into this murky arena have been met with significant opposition from the life insurance industry.
As Special Counsel to ProtectSeniors.org, Edward Stone is assisting the organization in their grass roots campaign advocating for the enactment of state legislation to protect retirees who have been moved out of their ERISA protected defined benefit plans and into group annuity groups.
Edward Stone Law can assist your organization in understanding the risks and benefits involved in pension de-risking transfers. For more information, email us at email@example.com or call (203) 504-8425.