Plan sponsors such as Ford, General Motors and more recently, Motorola, have made headlines for implementing strategies to remove liabilities from their balance sheets by cashing out participants and transferring their pension liabilities to third party insurers in accordance with existing law.
Verizon retirees attempted unsuccessfully to enjoin the transfer of their pension obligations to Prudential, and have failed to prevail in subsequent legal actions to undo the transactions. They argued, among other things, that their consent was required, and that they were being exposed to risk by the loss of PBGC insurance when insurers picked up the liabilities.
Others have been concerned that retirees offered the choice between a lump sum settlement and continuing ongoing annuity payments were ill-prepared to make informed choices or to manage the lump sum so as to provide adequate retirement income.
In response to these concerns, the ERISA Advisory Council has discussed whether additional legal requirements would be appropriate, and the PBGC will be requiring information about de-risking transactions as part of its reporting.
Senators Weigh In
Now two influential Senators have added their voice to this chorus of concern in a letter addressed to the heads of the IRS, Department of Labor, PBGC and the new Consumer Financial Protection Bureau. Ron Wyden, Chairman of the Senate Committee on Finance, and Tom Harkin, Chairman of the Committee on Health, Education, Labor and Pensions urge these agencies 'to consider clarifying all of the circumstances and conditions under which de-risking strategies are permissible in the absence of a formal plan termination" and "to move forward expeditiously with rules to protect plan participants." While acknowledging the right of employers to terminate parts of their plans, the Senators want guidance requiring advance notice and expanded disclosure of the risks to participants, and new rules to clarify the standards that apply to the choice of an annuity provider and other fiduciary duties involved.
Is This Guidance Necessary?
Purchase of annuities to remove participants from the plan books is not a new practice. When I first started practicing, it was fairly common for plan sponsors to purchase a fully paid up annuity contract to distribute to participants when they retired. Existing guidance provides that once the annuity is distributed or the accrued benefit is fully cashed out, a plan sponsor who has prudently selected the...