Senior Senators Urge Government Action on Pension De-Risking

Two senior U.S. senators are petitioning the government agencies that oversee qualified retirement plans to more actively protect pension plan participants’ rights during pension risk transfers.

The senators are Ron Wyden (D-Oregon), chairman of the Senate Finance Committee, and Tom Harkin (D-Iowa), chairman of the Senate Health, Education, Labor, and Pensions Committee. The pair delivered the letter to the Departments of Treasury and Labor, and to the Pension Benefit Guaranty Corporation (PBGC) and the Consumer Financial Protection Bureau (CFPB), all of which have shared responsibility for enforcing retirement plan legislation.

In short, the senators are pushing the federal government to establish “clear and specific rules” to ensure current employees and retirees participating in defined benefit pension plans have their interests protected during pension risk transfer moves. The senators say they are concerned that, while some types of de-risking strategies may be warranted to mitigate future pension funding risks, pension plans are increasingly engaging in new forms of de-risking activity, such as lump-sum payouts and the full or partial transfer liabilities onto outside insurance companies.  

Industry experts have long reported that pension risk transfer actions by defined benefit plan sponsors, such as annuitizing all or a portion of participants’ benefits and offering a lump-sum window for certain participant groups, are growing in frequency. Most recently, Motorola Solutions announced it is taking both actions for its pension plan (see “Motorola Announces Pension Transfer, Lump-Sum Window”). 

These strategies can pose risks to plan participants by removing vital federal protections and exposing individuals to the risks of managing a lump-sum on their own in retirement, the senators suggest. The chairmen urge the agencies to “do whatever is necessary” to ensure America’s current workers and retirees are adequately protected from the risks associated with pension risk transfers.

The letter suggests all parties involved in the U.S. retirement system should work to find risk transfer strategies that can be a “win-win” for both employers looking to mitigate risk and plan participants wanting to protect their anticipated lifetime income streams. The letter cites liability-driven investing as one such strategy, through which employers can start insulating the pension fund portfolio from market fluctuations while also preserving the pension plan well into the future.

As with other officials and agencies in government, the senators say they are worried that retirement assets transferred out of Employee Retirement Income Security Act (ERISA) plans are no longer subject to PBGC insurance protections—nor are such assets overseen by an ERISA fiduciary. “[Pension risk transfer] strategies may reduce costs or risks for employers,” the letter explains, “but they also pose risks to individuals, many of whom are already living on fixed incomes and cannot reenter the job market to earn additional income.”

This worry has led the PBGC to request permission from the Office of Management and Budget (OMB) to revise collection of information procedures under its Payment of Premium regulations—allowing better tracking and monitoring of covered and non-covered U.S. pension plans.

In their letter, Senators Harkin and Wyden request more robust guidance from relevant federal agencies to establish and clarify plan sponsors’ fiduciary duties for the de-risking of pension plans. The senators say they want to “recognize the rights of employers to terminate parts of their plans, but in a way that does not increase the risks of reducing the benefits promised to workers and retirees.”

Some of the specific recommendations from Harkin and Wyden would force the federal government to do the following:

  • Require advanced notice to participants and the government when a pension risk transfer will occur. This would include a clear disclosure of the risks to participants, analysis of the loss of PGGC protections, and investigation into the limitations of state guaranty associations, among other issues.
  • Examine and establish new standards that employers must follow in choosing an annuity provider to ensure that the annuity replicates as many ERISA protections as possible.
  • Mandate specific disclosures and other protections when retirees are offered lump sum distributions, warning them of the substantial risks of outliving their assets, the loss of spousal protections, and the tax consequences of taking a lump sum distribution.

The senators also believe that it is “imperative that the Departments of Treasury and Labor, the PBGC and CFPB consider clarifying all of the circumstances and conditions under which de-risking strategies are permissible in the absence of a formal plan termination.”

The letter closes by suggesting the risk to plan participants and the speed with which more and more companies are seeking to proceed with de-risking, without clear and specific guidance from the relevant regulatory agencies, raise the level of urgency around the issue. Some service providers have suggested that the current environment favors decisive de-risking action by employers.

The full text of the letter is available here.