Is de-risking causing more red tape?

As a defined benefit (DB) plan sponsor, you’ve probably had at least one discussion on the merits of de-risking your pension plan.  Over the past year, I’ve frequently blogged about the different methods used to manage a DB plan’s risk.  But due to several high-profile de-risking transactions made by companies like GM, Ford and Verizon, the de-risking method of transferring pension liabilities to an insurance company (also known as a “buy- out”) is getting more attention.

Because of large transaction amounts (e.g., GM’s pension risk transfer was $25 billion) and large number of participants impacted in these plans, the actions of the plan sponsors have come under scrutiny.  People are starting to question if these transactions were in the best interest of the participants and what happens if insurance companies default on their promises.

As a result of these buy-outs, participant benefits are no longer covered under the federal Pension Benefit Guarantee Corporation (PBCG) as part of ERISA.  However, legislators are considering passing laws in an attempt to provide additional protection for participants.  Rep. George Keiser (ND) submitted the “Pension De-Risking Model Act.” This Act provides retirees:

  1. Mandatory disclosures when benefits are transferred
  2. Creditor protection
  3. Opt-out options
  4. Supplemental protections in the form of third-party guarantees or reinsurance

While proponents of this legislation argue that it would further protect retirees’ benefits, they are not considering other important factors:

  • There’s already a robust system of state insurance regulation in place that covers issuers of guaranteed contracts.
  • It could be argued that participants’ benefits would have a greater level of security under a guarantee provided by an insurance contract than the PBGC, which is operating with a large deficit and is not backed by general tax revenue.

Ultimately, the reasons a company decides to sponsor a DB plan are to help provide income security to their participants and for the deductibility of contributions. Regarding the legislation, it will likely do little to strengthen the security of our country’s retirement system due to redundancy and conflicting protections.

Please let me know what you think.

In addition to blogging here, I also tweet regularly about DB topics of interest. Click to follow me on Twitter- @scottruba.

 

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Affiliation Disclosures

While this communication may be used to promote or market a transaction or an idea that is discussed in the publication, it is intended to provide general information about the subject matter covered and is provided with the understanding that none of the member companies of The Principal are rendering legal, accounting, or tax advice. It is not a marketed opinion and may not be used to avoid penalties under the Internal Revenue Code. You should consult with appropriate counsel or other advisors on all matters pertaining to legal, tax, or accounting obligations and requirements.

Insurance products and plan administrative services are provided by Principal Life Insurance Company a member of the Principal Financial Group® (The Principal®), Des Moines, IA 50392.

 

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