Henry Rose, former solicitor general for the Pension Benefit Guaranty Corp., would like to see the creation of a new federal agency to regulate insurance companies and offer annuity protection.
Lawmakers and government officials who crafted the ERISA did not foresee a meltdown at insurance companies that could result in failure to pay annuity contracts purchased from them.
Title IV of ERISA, which established the Pension Benefit Guaranty Corp. to insure certain "guaranteed" retirement benefits of employees, made no provision for insuring annuities purchased by employers or employees themselves from insurance companies, notes Henry Rose, a former general counsel of the PBGC and associate solicitor for legislation at the Labor Department during the Nixon and Ford administrations.
"It had not happened that group annuity contracts would not be paid. That was certainly not forseen and it was not provided for," he remarked. "There's nothing in ERISA that addresses it," said Mr. Rose, although some, notably officials of the American Association of Retired Persons, argue ERISA originally intended to provide insurance coverage for annuities as well.
Many employers turn over their responsibility for providing workers' retirement benefits to insurance companies by purchasing group annuity contracts from them. But, because the PBGC does not provide insurance coverage for annuities, millions of workers can be deprived of pension benefits promised by their employers if the insurance company from whom the annuity contracts were purchased goes belly up. Approximately 46 million Americans were covered by group annuity contracts in 1992, and the General Accounting Office, estimated between 3 million and 4 million pensioners received pension benefits in the form of annuities in 1991, according to the AARP.
The collapse of the Executive Life Insurance Co. of California and the Mutual Benefit Life Insurance Co. some years ago left thousands of workers stranded without the full retirement benefits they were counting on receiving. When California state insurance regulators took over Executive life in 1991, pensioners lost almost one-third of their monthly benefits for more than a year, according to the AARP.
Because insurance companies are regulated by the different states, not federal law, and ERISA does not override insurance regulations, improving the odds that annuity contracts eventually will be paid in full requires either improved state insurance regulations or the development of federal insurance regulations, Mr. Rose says.
"Either the state regulators will have to do better or ... the federal government will have to step in," he says. But Mr. Rose says it's premature to think about creating a federal agency to regulate insurance companies. "There is some indication the state regulators are becoming a little bit more stringent." Likewise, the insurance rating agencies also are tightening up on standards, he said.
Already, the AARP has asked legislators to amend PBGC legislation currently being considered in Congress to include a federal safety net for annuities purchased from insurance companies.
