Compliance August 7, 2023

Annuity Provider Representatives Push Back Against PRT Criticisms

Leaders in the PRT world argue that many criticisms of insurers are misguided and that the DOL’s IB 95-1 has been working well for a long time.

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Representatives of the life insurance and pension risk transfer industry say that only minimal changes, if that, are needed to the Department of Labor’s Interpretive Bulletin 95-1, that governs fiduciary standards for selecting an insurer for a pension annuitization.

The SECURE 2.0 Act of 2022 requires the Department of Labor to study IB 95-1 and report its findings and any recommended changes to Congress by the end of this year.

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The DOL’s ERISA Advisory Council hosted a stakeholder hearing in July to discuss possible changes to IB 95-1. In a written submission to the council, Agilis, an insurance consultancy in the pension risk transfer market, explained that IB 95-1 is working well, but some positive changes could still be made.

The firm stated that an updated IB 95-1 should require fiduciaries to consider both the use of reinsurance and the cybersecurity administration of the provider. Michael Clark, a managing director and consulting actuary with Agilis says cybersecurity “should be explicitly mentioned in the standard.”

Fiduciaries should also be made aware that they can use more than one independent expert when determining the safest annuity provider available, according to Agilis, and the DOL should make IB 95-1 a formal regulation, rather than an interpretive statement, so it has clearer legal force. Clark said the “DOL should issue formal regulations that codify IB 95-1.”

The Agilis statement also noted that some of the more common concerns about the PRT marketplace, as expressed at the hearing by advocates for labor and the elderly, are already addressed by IB 95-1. For example, the role of private equity investors as owners of insurance companies and that structure’s potential to create conflicts is addressed by the requirement to consider the insurer’s other liabilities or “lines of business.” Another concern, that insurers are adopting riskier investment portfolios, is also addressed already: “The quality and diversification of the annuity provider’s investment portfolio” is listed in IB 95-1, Clark said.

A written statement by retirement services and annuity provider Athene to the ERISA Advisory Council explained that part of the reason for moving to less liquid or riskier investments is because corporate bonds are more correlated and therefore less diversified than they have been in years past. This creates a need to diversify out of lower risk bonds.

Athene stated says that “there is simply no compelling need to overhaul IB 95-1” because the legitimate concerns about PRTs are already addressed by IB 95-1, and no PRT payment has been missed because of a solvency issue since IB 95-1 was issued, a remark repeated by other representatives of the industry at the hearing.

Many labor advocates argued at July’s hearing that annuitizing pension obligations removes Employee Retirement Income Security Act and Pension Benefit Guaranty Corporation protections from plan participants because life insurance companies are not backed by the PBGC or directly subject to ERISA.

Clark says it is “arguable that you are losing ERISA protections” because the provisions of the plan are transferred to the insurer and priced. The PRT product will normally mirror the benefits of the plan, and since that plan was designed under and subject to ERISA, the annuity is functionally the same.

Clark adds that the PBGC backup is not as great as some make it out to be. Pensions fail more frequently than insurance companies, and the PBGC typically requires participants to take a “haircut”—sometimes a heavy one.

The PBGC does provide a guaranteed level of protection and, as an institution, is less likely to become insolvent than a life insurance company, because it is backed by the federal government. This means that though participants may have to take a haircut if the PBGC takes over their pension, they are not facing the same risk they would be if their annuity manager becomes insolvent.

Clark concedes this point and says, “Both systems provide protection” but adds that it is “hard to see a scenario where people lose as much as they might if the PBGC takes over their benefits” and that when it comes to a catastrophic failure of an annuity provider such that participants take a heavier hit than they would under the PBGC, “the likelihood of that isn’t zero, but it is pretty darn close to it.”

Data and Research August 7, 2023

Government Workers Leaving Jobs Face Setbacks When Saving for Retirement

The majority of state retirement systems do not provide adequate retirement savings to departing employees, according to data from the Pew Charitable Trusts.

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While state pension funds tend to provide robust retirement benefits for government employees, this often does not remain true when workers leave public employment early or mid-career, new research from the Pew Charitable Trusts reveals.

Most state retirement systems provide separating employees with “an inadequate level of retirement savings,” and many employers are hesitant to increase their contributions, according to Pew.

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The research examined the 63 state and teacher retirement systems that participate in Social Security. For each retirement system, Pew calculated the savings rate for new plan members. In addition, for the nine state systems offering workers the choice between several plan options, Pew based its analysis on the default plan.

Of the 63 systems studied, 44 were defined benefit plans, four were defined contribution plans, 12 were side-by-side hybrid (with defined benefit and defined contribution components) plans and three were cash balance plans, said Aleena Oberthur, one of the authors of the report and the project director of public sector retirement systems at Pew, in an emailed response.

Oberthur said the research found that employees who separate early or mid-career often only have access to their own contributions to the retirement plan—funds taken from their paychecks—plus some amount of compounded interest on those funds.

In more than two-thirds of the 63 state and teacher retirement systems that Pew analyzed, Oberthur said employees were not able to take some portion of the employer contributions made on their behalf.

“For shorter or midcareer workers who do not have access to any employer contributions at separation, it’s difficult for them to be saving at least 10 or 12% of their annual salary–what experts typically state as necessary to be put on a path to retirement security,” Oberthur said. “On the flip side, when states do provide access to employer contributions, workers are much more likely to leave with adequate savings. Of the 16 retirement systems that provide a savings rate of at least 10%, 12 of those provide employees with some access to employer contributions.”

Low Average Savings Rates

Only seven systems—those in Montana, Georgia, Wisconsin, Nebraska, Arizona, Tennessee and South Dakota—provide a savings rate of at least 12%.

Georgia and Arizona are both new to the list, as increased employee contributions have pushed those state systems above the 12% threshold.

In the past year, Georgia significantly boosted its 401(k) employer match for participants of the Georgia State Employees’ Pension and Savings Plan. According to Pew, Georgia’s plan combines a defined benefit plan with a 401(k) and requires participants to contribute 1.25% of pay to the DB portion. The default contribution to the 401(k) is 5% of pay, but employees can change that amount. Before the recent changes, workers who contributed 5% to the 401(k) received a maximum 3% employer match for a total savings rate of 9.25%, well below the 12% recommendation.

After analyzing the 63 state retirement systems, Pew researchers found that the average savings rate remains stable at around 8% compared to the prior year.

About one-quarter of plans have rates of 6% or less, down from one-third of plans in 2022. However, the researchers said this can be attributed mostly due to mandated employee contribution increases—not increased access to employer contributions.

Lack of Employer Contributions

Pew also found that 13 systems boosted required employee contributions as compared with last year, leading to an increase in their respective savings rates. But again, most of those states did not provide a subsequent increase in available employer contributions.

“Access to greater employer contributions continues to play a key role in pushing savings rates above the benchmarks,” the report stated.

For instance, 12 of 16 systems with a savings rate of at least 10% allow separating workers to take some employer contributions with them, compared with only nine of the 47 systems with savings rates below 10%, according to Pew.

Oberthur said the challenge of managing rising pension costs for unfunded liabilities may have kept many states from making sure that pension benefits adequately covered government employees who change jobs early or mid-career.

“For the majority of states that fell below providing an adequate level of savings, state and local workers could put in years of public service but be left off a path to retirement security,” Oberthur said. “Now with a greater pressure on recruitment and retention, we’ve seen states like Georgia boost retirement savings for public employees to help make sure the state can recruit and keep those workers.”

State employees in Montana were found to have the highest saving rate, at nearly 16%, followed closely behind by Georgia employees and Wisconsin employees and teachers.

How to Increase Savings

To improve savings rates for employees who separate from their job but want to remain in the system until they reach retirement, Oberthur said plan sponsors can provide a mechanism that protects participants’ benefits from being eroded by inflation.

As an example, the South Dakota Retirement System allows vested members who separate to leave their account with the state during the period between their departure from state employment and eligibility to retire. It also provides COLA increases on their account during that period, Oberthur said.

“Another strategy for increasing retirement security for separating employees is to encourage participation in a supplemental saving account, possibly through auto-enrollment or auto-escalation features or by providing an employer match,” Oberthur said. “State retirement systems can also provide participant tools to help educate employees about retirement readiness as well as provide access to retirement plan advisers.”

The Arizona State Retirement System, Public Employee Retirement System of Idaho, Arkansas Public Employees Retirement System and Maine Participating Local Districts all have scheduled increases to their employee contributions in fiscal year 2024. The North Dakota Public Employees Retirement System will also begin enrolling new hires in a defined contribution plan starting January 1, 2025.

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