Senators Call for Guidance on Pension De-Risking

By Nevin Adams • October 23, 2014 • 0 Comments
With more and more defined benefit plan sponsors exploring — and undertaking — pension de-risking, a pair of leading U.S. Senators have asked regulators to establish some guidelines to ensure that those covered by those programs are protected.

Senate Finance Committee Chairman Ron Wyden (D-Ore.) and Senate Health, Education, Labor, and Pensions (HELP) Committee Chairman Tom Harkin (D-Iowa) have sent a letter to the Departments of Treasury and Labor, the Pension Benefit Guaranty Corporation (PBGC) and the Consumer Financial Protection Bureau (CFPB) requesting the federal government establish “clear and specific” rules to ensure current employees and retirees participating in defined benefit pension plans have their interests protected.

“…our concern is with the new forms of de-risking activities that allow employers to off-load their pension risks and liabilities, either onto an outside insurance company or onto individuals by offering lump-sum buy-outs to retirees who are already receiving monthly benefits for life,” the letter reads. “Both of these strategies may reduce costs or risks for employers, 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.”

In the letter, the senators noted that “it is not clear the extent to which plan sponsors are required to provide advance notice to workers, retirees, and the government when a plan seeks to de-risk,” also citing “confusion around fiduciary and settlor functions”, and noting that because employers often serve in both those functions, “there are inherent conflicts of interest.”

As for the requested guidance, the senators said it should include:

  • Requiring advance notice to participants and the government and “clear disclosure of the risks to participants, the loss of spousal, and PBGC protections, the limitations of state guarantee associations, and other issues”
  • Examining new standards that employers must follow in choosing an annuity provider “to ensure that the annuity replicates as many ERISA protections as possible”, and
  • Requiring “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 said they believed it was “imperative” that the agencies copied on the letter “consider clarifying all of the circumstances and conditions under which de-risking strategies are permissible in the absence of a formal plan termination.”