Pension risk transfers (PRT) allow employers to transfer their pension liabilities to insurance companies, typically through annuity contracts. This $45 billion market has become increasingly popular because of favorable financial market conditions leading to pension surpluses. In 2023 alone, 773 corporate pensions pursued PRTs, including major first-timers like Verizon and Shell USA.
Last year, the US Department of Labor (DOL) reported it was revisiting guidelines that could lead to regulatory changes and heightened scrutiny of the PRT process. Specific focus was on proposed updates to a 1995 Interpretive Bulletin (IB 95-1) that provides guidance on how defined benefit plan fiduciaries should select insurance companies for these transactions. Under the guidelines, pension plans are instructed to prioritize the “safest available annuity” when choosing an insurer.
In June 2024, the DOL released its long-awaited report on Interpretive Bulletin 95-1. The report summarized discussions with stakeholders and concluded that the DOL is not currently proposing amendments to the bulletin, though the topic is not closed to further discussion.
However, PRT continues to raise concerns among large employers, retirees and other industry stakeholders. Some viewpoints from the major constituencies include:
- Life insurers fear that any change in the Labor Department’s stance could have a chilling effect on the PRT market, discouraging employers from offloading their pension liabilities.
- Pension advocacy groups opt for greater regulatory clarity to protect the safety of pension obligations, as evidenced by recent lawsuits against companies like AT&T, Alcoa, and Lockheed Martin. These lawsuits allege that pension plan sponsors violated their fiduciary duties under the Employee Retirement Income Security Act (ERISA) by selecting risky annuity providers. Further, The Pension Rights Center and National Retiree Legislative Network have both raised concerns about how widespread the practice of pension risk transfers has become. Karen Friedman, PRC’s executive director – “Plan participants lose a lot in these transactions—including valuable [Pension Benefit Guaranty Corporation] insurance and other ERISA rights.” And NRLN’s president Bill Kadereit goes further in saying “There is no financial genius to dissolving liabilities you chose not to honor, nothing entrepreneurial and nothing to brag about to investors.”
- In particular, many lawsuits filed by workers have challenged de-risking transactions with Athene Holding, an insurance subsidiary of Apollo, the private equity firm. Critics argue plan sponsors derisking with Athene are choosing an annuity provider connected to a private equity firm with a higher risk structure than a traditional life insurance company.
Many in the retirement and insurance communities are wary of significant changes to the existing framework, as PRTs have become a common mechanism for defined benefit plans. And some industry representatives, like those from the American Council of Life Insurers, are calling for a more transparent rule-making process that would allow for public feedback.
Ultimately, the only way for corporates to exit a defined benefit plan is to derisk, so the challenges and differing viewpoints are not going away. Insurance stakeholders remain concerned that the DOL will augment regulations, while retirement stakeholders fear a weakening of retiree pension safety.