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, the Pension Benefit Guaranty
Corp. (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 (DB) 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 of 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.
letter suggests that 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 (LDI) 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
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.
full text of the letter is available here.