Annuity buy-outs continue, with insurers reporting over $34 billion in pension de-risking transfers in 2021.
What is Pension De-Risking?
Pension de-risking in its most general form is any kind of action taken by a defined benefit plan (DBP) sponsor to reduce the plan sponsor’s exposure to its pension liabilities. Pension de-risking can involve:
- Freezing pension benefits to some or all of the plan participants.
- Changing the pension plan investment strategy.
- Offering lump sums buyouts to some or all plan participants.
- Annuity “buy-ins” where a plan sponsor purchases one or more annuity contracts to cover pension obligations with the plan sponsor remaining responsible for making payment to the plan participants.
- Annuity “buy-outs” where the plan sponsor transfers all of its pension liabilities to an insurance company or other annuity provider by purchasing a group annuity contract and terminates its defined benefit plan.
- Annuity “lift-outs” where the defined benefit plan sponsor transfers some of its pension liabilities to an insurance company or other annuity provider by moving some, but not all of the plan participants out of the defined benefit plan. When using this pension de-risking strategy the defined benefit plan sponsor does not terminate the plan.
Retirees Lose ERISA Protections in Annuity Buy-outs and Lift-outs
In 2012 General Motors and Verizon Communications both entered into what are known as “pension de-risking” transactions by replacing all or part of their pension obligations to groups of former employees with annuities issued under group annuity contracts. Bristol-Myers Squibb followed suit in 2014, transferring $1.4 billion in pension obligations to Prudential. In 2015 Kimberly-Clark, Lincoln Electric Company, and J.C. Penney all purchased group annuity contracts to settle pension obligations. In late 2016, Farmington, Connecticut based United Technologies (UTC) transferred $7.75 billion of outstanding pension obligations in a pension de-risking transfer. More companies continued to engage in pension de-risking transfers in 2017, including International Paper, Dow Dupont, Accenture, NCR Corporation, and the New York Times Co. In 2018, Federal Express, The Ball Corporation, International Paper, Devon Energy, and others all transferred pension obligations to insurance companies. Since 2012 more than $100 Billion in pension liabilities have been transferred to insurance companies, replacing retirees’ pension payments with annuity payments.
These pension de-risking transactions involving the purchase of group annuity contracts move the retirees beyond the comprehensive and uniform protections intended by Congress under ERISA and into various non-uniform state statutory and common law regimes offering varying and sometimes inferior protections to retirees. Retirees also lose the back-stop protections provided by the Pension Benefit Guaranty Corporation (PBGC).
Edward Stone Law has worked with organizations supporting the introduction of state legislation addressing pension de-risking in New York, Connecticut, Massachusetts, Virginia and Pennsylvania and to amend federal laws to provide protections for retirees in pension de-risking transactions.
If you are a retiree organization facing a potential pension de-risking transaction we can assist you in evaluating the risks to your members and assist in evaluating alternatives and available options. You can reach us at (203) 504-8425 or by email at email@example.com.
Protections in Virginia
On July 1, 2018 new legislation went into effect in Virginia providing protections to retirees in pension de-risking transfers. Senate Bill SB755 introduced by Senator Glen Sturtevant (R-Midlothian) with support from Delegate Dawn Adams (D-Richmond) received unanimous support in both the Virginia House and Senate. Virginia law now provides that (1) amounts payable to a participant under an annuity providing retirement benefits are exempt from creditors’ claims, and (2) subsequent transfers of group annuity contracts funding retirement benefits are prohibited without the prior written approval of the State Corporation Commission. Amending Section 38.2-3125 of the Virginia Code, the complete text of SB755 is available here.
Protections in Connecticut
In 2015 ground breaking legislation was passed in Connecticut providing protections to retirees in pension de-risking transfers. On June 3, 2015 the Connecticut legislature unanimously passed H.B. 6772 providing creditor protections to retirees in pension de-risking transfers. On July 2, 2015 Governor Dannel P. Malloy (D) signed Public Act 15-167 into law restoring creditor protections to Connecticut retirees impacted by pension de-risking transfers. Without this legislation, creditors were able to garnish annuity payments designed for retirement. Follow up legislation was introduced in 2016 and 2017, but despite overwhelming support from the Insurance and Real Estate Committee the bills were not brought to the floor of the House for a vote.
Pending Legislation – New York
In 2019, Senator Andrew Gounardes and Assemblyman Peter Abbate sponsored pension de-risking legislation in 2019 entitled “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.” In New York State, both the Senate and Assembly must pass a bill before the Governor can sign the bill into law. The bills introduced by Senator Gounardes and Assemblyman Abbate rolled over into the 2020 legislative session and were referred to committees for review. Unfortunately, neither were called to the floor calendar for a vote.
On January 26, 2021, Senator Gounardes re-introduced this legislation under New York Senate Bill 2885. The bill is co-sponsored by Senator Anna Kaplan. Senate Bill 2885 has been referred to the Insurance Committee for review. Assemblyman Peter Abbate introduced A6099, a “same as” bill before the New York Assembly on March 10, 2021.
For more information on the pending legislation, please contact Attorney Edward Stone at firstname.lastname@example.org.
I.R.S. Regulations regarding Lump Sum De-risking
In July 2015, the IRS announced 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. IRS Notice 2015-49 has now been superseded by IRS Notice 2019-18 which retracts the earlier 2015 notice which proposed regulations designed to limit lump sum buyouts. This new IRS Notice will likely result in additional pension de-risking by defined benefits plan sponsor’s via lump sum buyouts. While lump-sum payments may be a cost effective way of de-risking pension obligations for a corporation, they may not be the best thing for retirees.