Concerns about the effect of lump-sum retiree distributions on the funded status of defined benefit pension plans with ongoing obligations to future beneficiaries were prominent as members of the ERISA Advisory Council tackled issues of “derisking” at a June 5 open meeting at the U.S. Department of Labor. There was high interest in the topic among attendees.
Increased derisking activities aimed at cutting costs for single-employer DB plans peaked in 2012. This led the EAC, appointed to advise DOL’s Employee Benefits Security Administration, to make the subject a 2013 priority issue for review. On June 5, the council heard testimony and questioned industry experts about types of one-time settlements being offered DB participants and retirees, the legal framework surrounding these “pension risk transfer” options and protections for affected beneficiaries.
Although multibillion-dollar transfers of retiree pension obligations to life insurance firms that administer annuities at General Motors Co. and Verizon Communications Inc. grabbed headlines last year, one witness told the council that by far, most lump-sum distributions aren’t huge amounts of money.
Penbridge Advisors Co-founder and Principal Steve Keating told the EAC that “the overwhelming majority of payouts are small, for smaller plans.” He said the handful of mega-derisking offers last year by big corporations were “skewing the perception” of the 230 derisking deals done in 2012. According to Keating, whose firm advises plan sponsor clients considering derisking, 227 of those pension risk transfer deals were valued at less than $250 million, and many were payouts of less than $10 million. Often, Keating said, retirees or plan beneficiaries who choose this option receive “less than $7,000 to $8,000 a year” from their new annuity, although he couldn’t provide precise figures.
“The cost of maintaining a [DB] plan is onerous for small plans” and opting for a so-called PRT helps them “right-size” their costs, Keating said. As interest rates rise, smaller companies are even more likely to opt for derisking, to control expenses tied to retirement plans, he continued.
EAC members also asked about potential annuity and long-bond supply shortages that could result from greater numbers of companies contracting with the few U.S. life insurers that buy and administer company pension obligations. Keating told the council that while there are now nine insurance companies active in the U.S. market for DB annuity sales, new entrants are evaluating the business.
Another witness, R. Evan Inglis, a principal at Vanguard who serves as that investment firm’s chief actuary for clients, mentioned potential fairness issues related to gender that may arise as a growing number of retirees accept lump-sum payments. Women typically live longer than men, so as retirees females may derive less long-term value from such a settlement.
Despite these obstacles, Inglis told the panel, “We can expect to see continued, accelerated derisking. Market conditions can drive more” of these deals, especially as interest rates rise from historic lows.
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