Ownership Structure, Investment Strategies of Annuities Concern Sponsors, ERISA Council Says

Jeff Turner, EBSA’s deputy director of the Office of Regulations and Interpretations, summarized many of the trends in the pension risk transfer market and commonly expressed concerns from pension fiduciaries and stakeholders at a hearing the council hosted Tuesday at the Department of Labor.

The hearing was held to discuss possible changes to Interpretative Bulletin 95-1, which requires that pension fiduciaries select the safest annuity providers when executing pension risk transfers. Considering modifications to IB 95-1 was required by Section 321 of the SECURE 2.0 Act of 2022, enacted in December 2022.

Turner explained that PRT annuity purchases have been trending up and hit a record in 2022, reaching 568 purchases totaling approximately $52 billion in assets. Higher PBGC premium rates, higher inflation, market volatility and concerns about plan funding are driving this trend, he stated. Higher discount rates, which reduce the attractiveness of making lump sum payments to pensioners, also contributed.

With such a significant increase, many pension fiduciaries, pension advocates and other stakeholders expressed concerns about the growth and evolution of the market.

Turner introduced the session by presenting two letters sent by Senator Sherrod Brown, D-Ohio, to the Department of the Treasury about PRT developments. Specifically, Brown highlighted “the growth of offshore reinsurance markets and increased risk-taking behavior across the life insurance industry, which could contribute to increased systemic risk across the financial system.”

Both reinsurance and risky investment strategies had been identified as common concerns among fiduciaries, according to Turner. He added as concerns the annuity provider’s ownership structure; its administrative experience and track record; and the insurer’s Risk-Based Capital, a ratio calculated by dividing capital by risk-weighted assets.

Turner identified private credit, asset-backed securities, subordinated debt, real estate and private equity as riskier non-traditional assets that are becoming more popular as investments held by annuity providers in their general accounts. Turner said there had been a “shift away from bonds” in insurers’ portfolios of about 4% between 2015 and 2022.

Addressing ownership structure, Turner noted that an annuity provider’s affiliates, parent company and other business relationships were all common concerns held by stakeholders. Affiliates can create conflicts of interest that result in investors being prioritized ahead of annuity holders, he said. Some stakeholders speaking at the hearing argued that an updated IB 95-1 should be required to include an analysis of an annuity provider’s parent company.

that any change to IB 95-1 should require the inclusion of insurers’ RBC ratios as part of fiduciaries’ analysis, according to Turner. He noted that some disagreed with that suggestion because, as state-regulated entities, the annuity providers are subject to different regulatory regimes, and many states do not permit insurers to advertise their RBC. Requiring its analysis on an updated IB 95-1 could effectively force those insurers to violate state laws.

Lastly, Turner said stakeholders have expressed concern about the administrative experience of life insurance providers, who might not have adequate staff to properly and safely administer more. Related administrative concerns such as cybersecurity, other information technology, periodic system reviews and even response times of call centers were all identified as key administrative items when considering a PRT provider, Turner said at the hearing

The council meets again tomorrow and will produce recommendations on possible changes to IB 95-1 to be provided to the DOL, which must report its findings to Congress by the end of the year.