The Department of Labor is unlikely to give life insurance companies all of the breaks they want in regulating certain pension fund assets invested in their central investment pools.
The department is expected to propose regulations guiding insurance companies on investing pension fund money held in group annuity contracts, as long as those investment contracts do not guarantee a stipulated benefit.
The Labor Department is required to issue the rules under changes to federal pension law enacted last August.
The American Council of Life Insurance, the Washington trade association, succeeded in obtaining the legislative fix to a December 1993 Supreme Court ruling in Harris Trust vs. John Hancock Mutual Life Insurance Co. The court ruled certain pension fund investment contracts held in a life insurance company's central investment pool or general account could be considered plan assets, and subject to federal pension law.
Insurance companies sought the change in the Employee Retirement Income Security Act because they said the Supreme Court decision made it difficult for them to manage their investments - including transactions with affiliates - that could be banned if they involved pension assets.
But Ivan Strasfeld, director of exemption determinations at the Labor Department, described as "loophole city," the life insurance industry's detailed recommendation to the department on drafting the new regulations.
The Labor Department might borrow the structure and format of the ACLI's recommendation, along with some definitions, Mr. Strasfeld added.
In particular, the Labor Department is expected to require insurance companies to follow stricter guidelines than those recommended by the ACLI if they change fees or the terms of the insurance contracts on their own.
In such situations, insurance policyholders would have the choice of opting out of the contracts, but might have to pay a "market value adjustment" or an early withdrawal penalty, if they withdraw the money all at once.
If the pension funds wish to withdraw the money from the insurance company in installments, the ACLI had recommended letting insurers repay the principal over up to 10 years, along with interest of at least the same rate the contract was earning at the time the policy holder decided to terminate the contract, but with a 1.5 percentage point discount.
The discount is intended to compensate insurance companies for interest-rate fluctuations during that 10-year period.
"That is a big risk they are taking," said Stephen W. Kraus, chief counsel of pensions at the ACLI.
The Labor Department, however, probably will require insurance companies to make the payout over five years, and might not accept the discount suggested by the insurance industry, Mr. Strasfeld said.
"Five years is probably more advantageous to plans," he said. Mr. Strasfeld noted that while the ACLI had adopted New York state insurance laws in suggesting the 1.5 point discount, "the question is whether that kind of subtraction is appropriate."
Additionally, if the investors wish to end the contract and take a lump sum, the Labor Department probably will let insurance companies impose an early withdrawal penalty, but will tell insurance companies how to calculate it, and ask that it be disclosed to investors. One way to calculate the market value adjustment might be to compare the value of the assets in the investment pool to an index of comparable investments; or by determining the market value of assets in the general account, Mr. Strasfeld suggested.
"What we are looking at is that people know what they are getting into, and then they can make a prudent judgment on whether it is an insurance product they want to invest in," Mr. Strasfeld said.
The life insurance industry believes that as long as policyholders know they could be asked to pay an early withdrawal penalty, and it has been applied fairly and calculated accurately, "investors know what they are getting into," said a source close to the ACLI who did not wish to be identified.
If the Labor Department asks insurance companies to calculate the withdrawal penalty using a stated formula, "that is a very big deal, because they are then regulating the insurance companies substantively, and taking the role of state insurance departments," the source said.
Life insurance companies had wanted to shape these regulations because last year's changes in the law ensured they would not have to worry about certain investment contracts in their general accounts being treated as plan assets so long as they comply with conditions laid out by the Labor Department in the new regulations.
Last year's changes in the law - and Labor Department regulations implementing the changes -only apply to non-guaranteed benefit investment contracts issued between January 1975, when ERISA became effective, and December 1998. Any insurance contracts issued after the end of 1998 that are backed by assets of an insurance company's central investment pool may be treated as pension plan assets and subject to regulation under ERISA.
The new Labor Department regulation is not expected to define what are guaranteed benefit policies under federal pension law; that should be dealt with separately. The insurance industry considers that definition important because insurance companies that "either clearly do not have guaranteed benefit policies or have policies where there is a question will have to make a decision and comply because the consequences of not complying are so severe," Mr. Kraus said.
Amendments to ERISA under the 1996 Small Business Job Protection Act also require insurance companies to describe how they divvied up investment income and expenses among the various policyholders, and to provide actual returns to policyholders, along with any other relevant financial information.
The new law also asks insurance companies to give investors information on when they may transfer funds out of the commingled investment pool to a separate account, and the terms, as well as risks, of such transfers.