Monday, December 14, 2015

Pension Risk (where to) Transfer

I opened my Plan Sponsor News Dash this morning and staring me in the face was the headline "Pension Risk Transfer Decisions More Than Financial." It was catchy enough that I decided to click on the link. What I found was that the attendant article was based on a white paper published by Prudential.

Think about that. One of the insurers that seeks business from companies looking to transfer their pension risks is warning plan sponsors that there may be more than meets the eye. While I give Prudential credit for laying out some of the issues, their doing so would certainly make me if I were a plan sponsor think twice.

Prudential focuses on what they describe as the three pillars of service delivery:

  • Retiree communication and education
  • Transaction and transition
  • Consultation and commitment
This is good stuff and it is important.

There are a few other elements that get less notice in the white paper (and perhaps it is Plan Sponsor's analysis of it). Prominent to me among those elements are the irreversibility of a decision to annuitize obligations of the plan and that such a decision is fiduciary in nature. Without commenting on whether they will have merit, what this commentator smells is litigation.

That's right. Not all annuity purchases will provide the same levels of security and service as plan sponsors expected. Without offering a legal opinion as I am not qualified to do so (I am not an attorney and do not and can not practice law), plan sponsors would appear to be well protected by following guidance from the Department of Labor (DOL) regarding "safest available annuity providers." But, as in many transactions that take time, that status could change during the process.

Consider insurer EL (those who were in this business 25 years ago may recognize a thinly veiled reference). At the time that defined benefit sponsor DBS makes its decision to annuitize certain of its obligations under the plan, EL has solid ratings from all of the major ratings agencies. DBS makes the decision based on a financial analysis to annuitize those obligations with EL. As we know, the process takes significant time and after a number of months, there are rumblings that EL may not be as solid as had been thought. Its ratings begin to slip.

Is DBS required to rethink its decision to annuitize with EL? Does it matter how far along in the process they are? Do the rumblings have to be substantiated? Do ratings have to have changed? Does anybody really know?

It's not unlikely that some attorney somewhere will find some potentially wronged participant or conversely and that the participant will decide that it's the right time to engage that attorney to litigate the matter. The fact is that even when you are fairly certain as a defendant that you will prevail in litigation, the defense is expensive. Did you factor that cost into your analysis of the financial effects of pension risk transfer (PRT)?

Suppose there was a better way. Suppose there was a way to intelligently transfer pension risk without making potentially questionable fiduciary decisions. Suppose you could leave the decisions that you really don't want to make up to your plan participants.

I'm not suggesting that you make the PRT process a democracy. No, I'm not suggesting that you assemble a quorum of participants and put the decision to a vote. But, there might be ways to give participants a say in the matter. And once a participant makes the decision for you, aren't you alleviating the burdens of litigation risk and front page of the newspaper risk?

If you are looking to go down the PRT road, annuitizing might be the right decision. On the other hand, it might not. 

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