Over the past several years, a number of companies have purchased annuities to move the responsibility for certain participants’ benefits to insurance companies, including big names like GM, Verizon, and most recently, Motorola. During a recent Mercer webcast discussing these transactions, when asked whether participants’ benefits were more or less secure after the move to an insurer, Duane Bollert, a partner in Region Market Development at Mercer in New York, New York, said participant benefit security is one of the key things plan sponsors and fiduciaries evaluate when selecting an insurance company.
He noted that in the plan, participant benefit security is a function of the funding of the plan, the financial strength of the plan sponsor, and the backing of the Pension Benefit Guaranty Corporation (PBGC). When benefit liabilities are moved to an insurance carrier, benefit security is a function of the financial strength of the insurance carrier; the funding level of the separate account holding assets, if there is one; and the ultimate backing of state guarantee associations.
“It’s complicated to compare participant [benefit] security under each of these scenarios, and given the different legal structures it’s an apples and oranges comparison,” Bollert said.
But, he said there are some things that can be considered.
- Insurance companies have been providing group annuities for decades, and annuities are one of the two ways delineated in the Employee Retirement Income Security Act (ERISA) for disposing of DB obligations;
- Annuities are well-established products with a long history and a relatively stable market;
- Insurers are required to hold reserves against liabilities and have additional capital surplus to back obligations;
- Insurers also use conservative investment portfolios that are around 85% fixed income.
In addition, if the transferred pension assets are held in a separate account, as is the case in the Motorola transaction, there’s an additional layer of protection, as separate accounts cannot be accessed by creditors if the insurer becomes insolvent, according to Bollert.
Finally, if an insurer becomes insolvent, a state guarantee association will guarantee benefits from $100,000 to $500,000 per participant, depending on the state.
“If you compare that to DB plans, which can operate for years underfunded, are not required to hold any additional capital, and generally have more aggressive investment mixes, it’s easy to argue that buyout protection is at least as strong as plans,” Bollert said.
While some may argue the guarantee from the government via the PBGC is better than the guarantee from a state association, he noted that the PBGC is underfunded and really doesn’t offer an explicit guarantee of benefits. Also, the PBGC has benefit limitations, so participant benefit amounts higher than those limits are not protected.
Another way to look at the participant benefit security question is to consider the history, Bollert contended. Many pensions have transferred to the PBGC over the years, including those of large employers that were previously financially strong. Very few insurers have become insolvent, and in the cases in which they have, regulators have stepped in and transferred the insurers’ obligations to solvent carriers, and few individuals have suffered losses, he added.
“The ultimate answer to the comparison and question is complex, and there are reasonable arguments on both sides, but decades of experience indicate a reasonably strong case can be made that participant [benefit] security is at least as good under an annuity, if not better than, a traditional pension plan,” Bollert concluded.
A recording of Mercer’s webcast, “Deep Dive on Recent Pension Buyout Activity,” is available here.