Sean Brennan

Some have argued that employers’ transition from defined benefit to defined contribution retirement plans has been a decades long failed experiment. Setting aside enough of one’s hard-earned money to last through retirement is difficult and has proven to be a struggle for many Americans. In fact, the National Institute on Retirement Security has estimated the retirement savings deficit at between $6.8 trillion and $14 trillion, and 45% of working households have no retirement savings at all.

That being said, DB plans have not been without their own issues historically and have experienced significant volatility in funded status due to mismatched asset and liability cash flows. In addition, most corporations do not have sufficient expertise and infrastructure to manage the associated investment, longevity and operational risks. And the Pension Benefit Guaranty Corp. backstop comes from a non-government-backed agency that has limited tools to safeguard its solvency – one of which has been to cut benefits in many cases. These realities make pension risk transfer an attractive and pragmatic solution for plan sponsors that serves to enhance security for plan participants.

The PRT Solution

The life insurance industry offers a compelling way for DB plan sponsors to secure their legacy obligations through PRT transactions, a trend that has been embraced over the past decade. According to global insurance broker Aon, “$315 billion of [U.S.] pension obligations have transferred from plan sponsors to insurance companies” since 2012. 

PRT enables plan sponsors to increase participant security and reduce their plan sizes relative to their balance sheets, and allows companies to focus on their core businesses. PRT transactions also have several layers of protection that give DB plan sponsors and participants peace of mind. Under the purview of the National Association of Insurance Commissioners, PRT insurers invest more conservatively than pension plans (within protected separate accounts in most cases), closely match asset and liability cash flows, and hold strong capital buffers well in excess of the minimum required by regulators.

Alongside the NAIC, a dedicated PRT fiduciary oversight process is enforced at the federal level by the Department of Labor. The DOL set forth a principles-based framework for prudent insurer selection in its Interpretive Bulletin 95-1, where plan fiduciaries consider “a number of factors relating to a potential annuity provider’s claims-paying ability and creditworthiness,” with the ultimate goal of selecting the “safest annuity available.”

As a result of these layers of protection, the differences in financial strength among the most secure PRT insurers are minor. DOL fiduciary guidance acknowledges this by indicating that there is more than one “safest available” insurer.

Questions Raised

Increasing PRT volumes have encouraged detractors, often with their own agendas at odds with participant security, to question the safety of PRT transactions. One focus is whether a PRT group annuity is as secure as a pension plan regulated by the Employee Retirement Income Security Act and insured by the PBGC. Other questions relate to evolving insurer investment and capital sourcing practices, including the use of offshore reinsurance.

Reality Check

The positive impact of PRT transactions on retirement security is irrefutable. A clear track record shows that the insurance regulatory framework protects consumers far better than the ERISA system and the PBGC.

Plan participants whose benefits have been guaranteed by a PRT insurer have enhanced security from layers of regulatory capital and other protections put in place by insurers, which are not required of corporate DB plans. Because of these strong protections, not one PRT retiree or beneficiary has had their benefits cut since the issuance of DOL 95-1 nearly 30 years ago.

Under the ERISA regulatory framework there have been more than 2,500 distress plan terminations involving more than two million plan participants in the same timeframe. An outcomes report from the PBGC itself shows that an estimated 16% of those participants had their benefits cut, by an average of 24%.

The principles-based approach underlying the DOL’s fiduciary guidance is one driver of the insurance system’s resiliency. The DOL recently reaffirmed this approach following a thorough review of 95-1. The department’s approach is intended to account for market trends and evolving business structures.

As an example, the use of reinsurance backed by Bermuda-based reinsurers is considered by fiduciaries under the DOL 95-1 framework, as they review capital support and transaction guarantees as set forth in the guidance. Fiduciaries are generally comfortable with this structure because annuity writers based in the U.S. must adhere to statutory accounting principles and stringent capital standards. Athene, for example, operates its Bermuda subsidiaries to substantially the same capital and risk standards as its U.S. affiliates.

Independent fiduciaries and their expert advisers are best qualified to provide an expert review to ensure an appropriate comparison of insurers.

Bottom Line – Do the Work

If a pension system were designed from scratch with retiree security as the number one priority, it would look like the insurance system. It has been independently verified time and time again that the PRT system maintains and enhances retirement security. Cursory review should not replace the sound rigorous analysis that underpins the PRT system, and any honest evaluation of its merits.

Sean C. Brennan is executive vice president of pension group annuity and flow reinsurance, Athene Holding Ltd., and partner, Apollo Global Management.

This feature is to provide general information only, does not constitute legal or tax advice, and cannot be used or substituted for legal or tax advice. Any opinions of the author do not necessarily reflect the stance of ISS STOXX or its affiliates.