Labor Secretary Considers Rewrite of Pension Risk Transfer Rules

What You Need to Know

The Labor Department posted the bulletin that shapes pension risk transfers in 1995.
Secure 2.0 told the department to give the bulletin a checkup.
One DOL concern: Whether private equity owners make use of group annuities to shed pension risk riskier.

Labor Department officials are thinking about whether they should update pension risk transfer guidelines to reflect possible increases in the riskiness of group annuity issuers.

Experts who are advising the department disagree about whether the growing role of private equity owners and the increased use of offshore reinsurance are causing problems, according to Julie Su, the acting secretary of Labor.

The department needs to talk to more people before it tinkers with Interpretive Bulletin 95, the 29-year-old batch of “safest available annuity” guidance that shapes pension risk transfer deals, Su writes in a new report to Congress on the adequacy of the bulletin.

“Any next steps will involve public notice and comment,” Su said.

But ”some stakeholders are very concerned about developments in the life insurance industry that may impact insurers’ claims-paying ability and creditworthiness,” she said, adding that Labor’s Employee Benefits Security Administration believes it should continue to study developments in the life insurance industry and in the pension risk transfer market.

What it means: The acting head of the Labor Department is not sure what to think about the strength of the life insurers that sell big group annuities to pension plan sponsors.

Any changes the department ends up making could have an enormous effect on employers, the remaining defined benefit pension plans and the group annuity market.

The history: Many employers once raced to set up defined benefit benefit pension plans, or plans designed to pay a specified amount of benefits for life once the participant retires.

Defined benefit plans began to fall out of favor in the 1990s, after yields on bonds and other relatively safe, steady investments fell and the federal government put more focus on plan stability.

One way the government encouraged employers to think about pension plan stability was by having the Pension Benefit Guaranty Corp., the entity that backs pensions, charge shakier-looking plans higher premiums.

An employer can reduce PBGC premiums by buying a participant’s pension benefits or using an annuity to fund the benefits.

Su notes that the Labor Department developed Interpretive Bulletin 95 to set general guidelines for pension risk transfers shortly after Executive Life failed. Executive Life had been a major annuity issuer in the early 1990s.

The department prepared the new Interpretive Bulletin 95 review to comply with section 321 of the Setting Every Community Up for Retirement Enhancement (Secure) 2.0 Act. Secure 2.0 drafters asked the department to tell Congress whether it thinks the bulletin needs to be revised or supplemented with additional guidance.

The market data: Between 2015 and 2022, about 3,135 of the 39,839 single-employer defined benefit plans insured by the PBGC used either lump-sum pension benefit buyouts or annuity purchases to transfer pension risk, according to a new PBGC report cited by Su.

In 2022, the single-employer plans included in the report still had about 24 million participants, but, over the previous seven years, benefit buyouts and annuity purchases had removed 3 million participants from the PBGC’s risk pool.