Have you heard of the term Pension De-risking? The corporations may like what it does for their books about future obligations. But Pension De-risking Hurts Retirees. It is a corporate trend that has taken place in recent years. It consists of dumping their retirees from their earned federally protected pension plans. What they do is convert them into insurance annuities. Corporations have named this practice of dumping their retirees from their books as “Pension De-risking.”

This has happened to tens of thousands of retirees. Including retirees from Ford, General Motors , Verizon and most recently CBS. This is all about being good for the corporation, not the retiree. But then breaking promises is always for the benefit of the promise breaker.

Maybe there are very few today who have a pension anymore. If you don’t you could care less. But if you don’t have a pension you probably know someone you care about who does. Hopefully this information will have some importance to you as a corporate trend of negative retiree treatment to be aware of.

The Reason Pension De-risking Hurts Retirees.

Anyone with a corporate pension should be concerned about this practice. That’s because converting a federally protected pension to a State Governed Insurance Annuity means the loss of ERISA protection. ERISA was signed into law in 1974 by then President Gerald Ford. It has successfully protected retirees for 40 years. Conversion to an insurance annuity means retirees lose all the following:

• All protections provided by ERISA’s fiduciary duty standards.
• All ERISA mandated annual financial disclosures and reporting.
• All ERISA protections mandating minimum funding thresholds.
• All ERISA rights to ready access to the federal courts.

Retirees also lose beyond the ERISA protection. They also their Pension Benefit Guaranty Corporation (PBGC) coverage. Along with certain protections from creditors’ claims.

Why Corporations Dump Their Retirees through Pension De-Risking

It is all about the money. Strictly financial. A total focus on their finances, not the retirees. Many pension funds are underfunded. Corporations want to run from their responsibility for funding and maintaining a pension trust at the required level needed to pay previously promised retiree benefits.

They have found that they can legally set into motion Pension De-risking. They do so by converting their retirees from a pension to an insurance annuity. By doing so it removes the future liability which can improve their credit rating and lower their borrowing cost. Once converting retirees out of their federally protected pension plan the corporation also gets to stop paying millions of dollars each year in required premiums to the PBGC. So Pension De-risking not only hurts retirees but it also screws over the PBGC. It hurts the PBGC by reducing the amount of money it receives. The PBGC uses the premiums paid to it to cover the cost of the failed pension plans it has and must take over.

It is just the latest twist in retiree pension plan insecurity

The number of Corporations that provide defined benefit pension plans to its workers have been in steep decline since 1985. Hundreds of corporations have frozen their pension plans. Existing employees in frozen plans no longer earn more pension benefits. Freezing a pension plan also means any new employees cannot take part in the pension plan. Even if the overall pension plan isn’t frozen, it is very common for corporations to have locked out all new employees from joining any existing pension plan benefit.

This latest corporate trend of Pension De-risking by simply dumping retirees from their pension plans is just the latest downward pension security twist. Corporations rationalize breaking pension promises by saying “we are not in the business of providing pensions; we are in the business of making more money.”

While this is true. Try asking the corporate masters if the same pension elimination, freezing, and Pension De-risking treatment is happening to their executive pension benefit plan. They will say it isn’t because they have to continue paying them contractually.

In today’s world it is unheard of for a corporation to create a new defined benefit pension plan for its employees. However a golden pension benefit is still usually part of executive benefits being offered.

Recently a new set of mortality tables was adopted by the Society of Actuaries for pension plans to use. What corporations see is another 30 years or so of having to cover millions of retirees with a rising life expectancy. This new mortality table has added increased pressure on corporations already scoffing at fully funding their pension plans. This gives them an excuse to end their responsibilities for providing retiree pension obligations into the future. They do it by cutting a deal with an insurance company.

What Retirees can Expect Losing with Pension De-Risking

As mentioned above in this post. Retirees lose all protections and rights provided under ERISA and the PBGC. Once a retiree’s protected pension is converted to an insurance annuity by way of Pension De-risking their annuity is under state regulation. The annuity protections vary state by state. It depends on where the retiree lives. Protections are not provided in any uniform basis. It will be nothing like the uniformity of the PBGC protection. Where it provides a maximum yearly amount of guaranteed payment based on a number of  factors. Including the retiree’s age. Once under state regulated insurance annuity. The state guaranty association’s protection is limited to a lifetime amount. If the insurance company where the retiree’s pension has been off-loaded to comes under severe financial impairment or insolvency, the retiree’s protection coverage is decided by the state where the retiree lives.

State Protection Limits Example: (see table of coverage limits by state)

• Thirty seven states, including Arizona, Colorado, Idaho, Iowa, Minnesota, Montana, Nebraska, New Mexico, Oregon, North and South Dakota, limit coverage to a lifetime maximum of $250,000.
• New Hampshire, Wyoming and Puerto Rico have a lifetime maximum of $100,000.
• Utah limits lifetime coverage to $200,000.
• Arkansas, Florida, Georgia, North Carolina, Oklahoma, Pennsylvania, South Carolina Wisconsin and the District of Columbia limit coverage for annuity holders in the case of a default or shortfall to a lifetime maximum of $300,000.
• Connecticut, New Jersey, New York and Washington limit coverage to a lifetime maximum of $500,000.

To add complexity to this issue is the amount of state guaranty association coverage protection provided will change when a retiree moves from one state into another state. A person who retired in Connecticut would drop from their lifetime $500,000 coverage amount when moving to New Hampshire to a limited lifetime coverage of $100,000. That certainly would hurt a retiree’s retirement funding.

What is the risk of insurance company insolvency?

The PBGC always takes immediate and decisive action when any federally regulated pension plan fails. On the other hand state guaranty associations don’t like rocking the boat by taking quick action. That is because they depend solely on contributions from their member life insurance companies. There were two huge examples of this with the failures of Executive Life Insurance Company  and Executive Life Insurance Company of New York. It took over a decade for the state guaranty associations to address the problems resulting in retirees suffering significant payment reductions and payment disruption.

The other negative retiree impact of Pension De-risking: Protections from creditors

Once a retiree is dumped from their pension plan and converted to a group insurance annuity the monthly annuity payment may lose protections from creditors. Annuity creditor protection varies from state to state. Unlike a PBGC protected pension benefit, the annuity may be open to creditors to collect against their annuity payments.

In Closing

It’s obvious that there are some big negatives and new risks for retirees when they are part of Pension De-risking being switched to an insurance based annuity. Hopefully nobody gets placed with an insurance company that later becomes insolvent during their retirement. If you have a pension or know someone with a pension and hear anything about Pension De-risking or moving the pension to a state regulated insurance annuity then be aware that corporate Pension De-risking just moves the risk to the retiree.

Have you heard of Pension De-risking?

What are your thoughts about this new practice?