Regulators Take Notice of Pension De-risking

GAO report criticizes disclosures in lump-sum offers; PBGC to require reporting of de-risking transactions.

More and more companies are eliminating some of the risk involved in their pension plans by purchasing a group annuity to cover future payments to some participants or by offering lump sums to participants. As corporate interest in de-risking grows, regulators are getting interested too.

Last month, a Government Accountability Office (GAO) report prepared at the request of Rep. Sander Levin, D-Mich., criticized the disclosures that companies provide to plan participants who are being offered lump sums. And the Pension Benefit Guaranty Corp. (PBGC) announced last week that it will start requiring companies to report de-risking transactions.

Carol Buckmann, a counsel in the pension and benefits group at law firm Osler Hoskin & Harcourt, also noted a letter sent last fall to the Departments of Treasury and Labor, the PBGC, and the Consumer Financial Protection Bureau by Democratic Senators Tom Harkin of Iowa and Ron Wyden of Oregon urging the agencies to review the effects of pension de-risking.

“There are at least some people saying very loudly that the government needs to get more involved in these transactions,” Buckmann said.

There are no definitive statistics on pension de-risking actions, but an Aon Hewitt survey of 183 large companies with defined-benefit pension plans, released in February, showed that 47% said they were very likely or moderately likely to offer lump-sum buyouts this year to some former employees who are vested in the plan, while 21% said they were considering purchasing a group annuity for some participants.

The PBGC’s new reporting requirement is an attempt to remedy the shortage of data about pension de-risking. The PBGC has a financial interest in de-risking; lump-sum buyouts and annuitizations decrease the funding the agency collects from pension plans by cutting the number of plan participants for which plan sponsors must pay the PBGC’s per-person premium.

Starting with their 2015 PBGC premium filing, plan sponsors must report both group annuity purchases and lump-sum offerings, including such details as how many participants were offered a lump sum and how many accepted the offer.


Lump Sums’ Suitability

The GAO’s report expresses concerns about the suitability of lump sums. Participants interested in a lifetime stream of income could have a hard time matching what they would have received from the pension plan in the retail market, the report said. Moreover, participants who receive a lump sum face the challenge of investing that money, as well as the risk they will spend the money rather than saving it for retirement.

To compile its report, the GAO identified 22 de-risking transactions, examined the information provided to participants in 11 of those transactions, and interviewed 33 participants.

The agency identified eight aspects of lump-sum offerings that participants needed to understand. “Most” of the information packets examined included “a substantial amount of this key information,” according to the report. “However, all of the packets GAO reviewed lacked at least some key information.”

But Kathryn Ricard, senior vice president for retirement policy at the ERISA Industry Committee (ERIC), which represents large companies on benefits issues, argued that large plan sponsors provide participants with “enough resources and information to make a decision,” adding that plan sponsors and their retirement plans are “heavily regulated” already.

“Obviously large employers are always looking to make things better for their participants,” she added. “If more disclosure is appropriate, we would agree with that.”

Jane Lee, principal in the knowledge practice of the Compliance Consulting Center at Buck Consultants at Xerox, said the key areas that the GAO focused on are areas that practitioners concentrate on as well. “Larger employers and the larger consulting firms and law firms offering lump sums seem to be doing this already.

“Practitioners take the approach that a participant should be as informed as possible,” she said.

Carol Buckmann, OslerCarol Buckmann of Osler Hoskin & Harcourt, pictured at left, noted the relatively small sample of de-risking transactions that the GAO worked from. “They spot-checked some transactions and the packets of informational material, but it seems to me that they still had a very small group,” she said.

Buckmann also questioned some of the GAO’s concerns, such as whether participants understand the protection provided by the PBGC and the fact that they lose that protection when accepting a lump sum.

“The purpose of PBGC protection is to ensure you get your pension if your employer goes under,” she said. “But if you get the lump sum, you’ve already got the whole pension—there’s no need for that insurance anymore because you’ve been paid out in full.”

Buckmann put more weight on some of the report’s other criticisms. “There’s some discussion that some of the notices [the agency] looked at didn’t disclose to the participants that they would have become eligible for an early retirement subsidy and they would lose that if they took a lump sum,” she said. “That’s an area where we may need regulation.”

She also noted, as another area that could see regulation, the GAO’s contention that employers selecting an interest rate for the calculation of lump sums were using a look-back rule to choose a rate that favored the company rather than plan participants.

“But will there be a wholesale set of new rules that everybody needs to follow?” she said. “Nobody knows at this point.”

Some of the GAO report’s criticisms of lump-sum documents echo recommendations made in 2013 by the Labor Department’s ERISA Advisory Council. The council suggested, for example, that Labor look at whether lump-sum offers disclose anything about early retirement or other subsidies and how offers compare the value of the lump sum with that of the benefits promised by the pension plan.

To date, the Labor Department has not proposed any rule changes in response to those ERISA Advisory Council recommendations.

Buckmann said any effort to regulate de-risking transactions needs to keep in mind the broader issue of the disappearance of pension plans and how to encourage employers to keep their pension plans going.

“If the ability to de-risk is there, that is something that encourages people to keep plans, and that’s a good thing,” she said. “If there’s too much restriction on de-risking transactions, that may have an impact on people’s overall willingness to continue these plans.”

ERIC’s Ricard argued that at this point, large plan sponsors are more concerned about the direction of interest rates and the impact of new mortality tables and higher PBGC fees on their plans than they are about the possibility of additional regulation.

Tips for Plan Sponsors

Buckmann stressed the importance of complete disclosure. “If people are in fact not getting the value of a subsidy that they would have qualified for in the lump sum, it’s very important that they disclose that,” she said. “People need to try to make disclosure as understandable as possible and not too technical.”

To ensure that participants understand the lump-sum offer, she suggested that plan sponsors try out the materials they plan to send on a test group first to see if they can understand them. “That’s not a legal requirement, but I think it’s very helpful to do that and make sure you’re getting through to people,” she said.

Buckmann also noted that the Internal Revenue Service’s private-letter rulings issued in connection with the big Ford and General Motors de-risking transactions in 2012 described the companies’ offers of financial advisers and counseling to plan participants who had been offered a lump sum.

“That’s very helpful,” Buckmann said, noting that people’s situations differ. “For some, a lump sum might be a good deal. But they need to make decisions that are informed, and if they don’t have the ability to evaluate these technical issues themselves, it’s very important that they have access to somebody who is retained to advise them.”


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