Corporate pension execs wary of derisking fallout

Corporate executives are bracing for regulatory judgment calls on how they handle derisking through lump-sum payments and annuity purchases, lobbyists say.

Plan executives have been closely watching the Labor Department's ERISA Advisory Council, which has spent much of the year looking at lump sums and annuities and considering ways to improve regulatory oversight of the practices. Council members represent diverse interests, including employers, unions, retiree advocates, lawyers and insurers.

That effort culminated with recommendations presented Nov. 5 to Assistant Secretary Phyllis Borzi, who heads the Employee Benefits Security Administration. The council stopped short of recommending a formal rule-making process.

Instead, council members recommended the Department of Labor consider ways to develop more explicit guidance for plan executives and more disclosure for employees on how the derisking strategies are calculated and implemented, and what is their potential impact on participants.

“That's the balancing act,” said Craig Rosenthal, a partner in Mercer's retirement risk and finance practice in New York, who works with companies that already have derisked, or are considering it now, primarily through offering lump sums. “If the additional guidance became too burdensome, then I think the sponsors would have to rethink whether it's worthwhile.”

The council heard testimony in September and October on whether the DOL should provide for a notice and comment period before issuing additional guidance in several key areas. One is the distinction between when an employer is deciding to derisk and the fiduciary responsibilities of the plan sponsor when carrying out the transactions. Another is whether to expand rules for how plan sponsors select the safest annuity, and a third is what type of participant disclosures are needed before electing lump-sum distributions.

The council also recommended that DOL officials:

nclarify that the rules for selecting annuities, known as Interpretive Bulletin 95-1, apply to any annuity purchase, not just those made for a plan termination, and consider developing safe harbors for those purchases;

nprovide at least 90 days' disclosure for lump-sum offerings within a specific window, similar to plan termination notices, to allow participants to compare their options; and

nprovide education and outreach to plan sponsors on their options and consider collecting transaction data.

Careful to balance the need for immediate guidance on some issues and the importance of public input before any major legal changes are made, council members felt it best to let EBSA officials figure out the next steps. They agreed, however, that any changes should only be made prospectively.

“We certainly heard a lot of different perspectives, and we worked hard to achieve balance,” said Richard Turner, who chaired the advisory council's derisking issue group.

“Hearing those perspectives really underscored the value of the process that we went through. We tried to focus on areas where plan sponsors, plan participants and the voluntary system as a whole could benefit from additional guidance,” said Mr. Turner, who is vice president and general counsel of the Variable Annuity Life Insurance Co. in Houston. “We encourage people to read the (council's)report” when it comes out in early 2014.

Employer advocates, who worry DOL officials would err on the side of protecting participants from possible missteps or abuses, were disappointed to lose their bid for a formal process of notice and comment.

“Changing rules without full public vetting is not good policy,” and can have “immediate, harmful effects,” said Lynn Dudley, senior vice president of policy for the American Benefits Council in Washington.

Ms. Dudley said her group will work with the EBSA and other stakeholders to continue the dialogue with regulators.

Participant groups including the AARP, the AFL-CIO, the National Retiree Legislative Network and the Pension Rights Center worry that formal rule-making would come after the fact — particularly for lump sums — for what has become a fast-moving trend,

Insisting on formal rule-making “is a not-so-thinly veiled attempt to delay the issuance of guidance, perhaps for years,” the groups wrote in a letter to the council.

“The council made some initial recommendations on strengthening disclosure and developing a process for dispute resolutions that we hope the DOL will consider,” Karen Friedman, executive vice president and policy director of the Pension Rights Center in Washington, said in an e-mailed response to questions.

Ms. Dudley argued that corporate executives do not make decisions about annuities and lump sums lightly. “It's hard from an implementation standpoint, and I think companies are going to a lot of trouble to do it right and educate people.”

Mr. Rosenthal, who testified before the advisory group in June on behalf of the American Benefits Council, thinks that plan participants are getting sufficient information to help them decide whether to choose a lump sum or annuity. “Everything that I've seen has been done thoughtfully and carefully. One of my own concerns is if we give (participants) too much information. We don't want to overload them. We want to give them the right amount of information.”

Offering lump sums to retirees — like General Motors Co. did — gets the Internal Revenue Service involved to issue private-letter rulings to employers.

Mr. Rosenthal said Mercer is also seeing more interest in offering lump sums to vested former employees to help corporations lower their pension liability and reduce some financial volatility due to administrative costs that can sometimes equal the benefits and the cost of PBGC premiums. In those cases, typically half of those participants take the cash.

James Gannon, director of asset allocation and risk management at Russell Investments in Seattle, notes that 2012 was a big year for offering lump sums, particularly to former employees, when provisions in the Pension Protection Act of 2006 that changed the basis under which plans paid lump sums were fully phased in.

Now, said Mr. Gannon, “plans are waiting for certain things to happen.” Two of the biggest factors, he said, are that plans must reach a funding level of 80%, the minimum threshold for being able to offer lump sums, “and there's also the interest rate story.”

With historically low interest rates that have sent plan liabilities and the potential cost of annuities or lump sums soaring, plan sponsors interested in derisking still think it is expensive.

“If rates (get and) stay high or higher, I think we're going to see more activity in 2014,” said Mr. Rosenthal of Mercer. “Some clients still think we haven't seen the bottom in rates, and some think rates will go higher. But the interest is there and sponsors are certainly taking steps to be ready.”