EBSA Reviews Pension Risk Transfer Interpretive Bulletin

The Department of Labor’s Employee Benefits Security Administration (EBSA) has issued a consultation paper on its review of Interpretive Bulletin (IB) 95-1, which concerns fiduciary standards applicable when selecting an annuity provider for a pension plan.

SECURE 2.0 requires the DOL to review IB 95-1 and consult with the ERISA Advisory Council to determine whether amendments to IB 95-1 are warranted and to report to Congress on the findings, including an assessment of any risk to participants. 

About IB 95-1

IB 95-1 provides guidance on fiduciary duties under ERISA Section 404. It provides that plan fiduciaries:

• must take steps calculated to obtain the safest annuity available unless it would be in the interest of the participants and beneficiaries to do otherwise; 
• must conduct an objective, thorough, and analytical search in order to identify and select providers from which to purchase annuities;
• should remember that it is not sufficient for them to rely only on ratings provided by insurance rating services;
• need to obtain the advice of a qualified, independent expert if they lack the necessary expertise to evaluate such factors;  
• may conclude, after conducting an appropriate search, that more than one annuity provider is able to offer the safest annuity available;
• would violate the fiduciary’s duty to act solely in the interest of the plan participants and beneficiaries if they purchase more risky, lower-priced annuities to maximize a reversion of excess assets paid to the plan sponsor;  
• should take special care in reversion cases when the fiduciaries’ interest in the sponsoring employer could create a prohibited transaction; and
• will need to obtain and follow independent expert advice calculated to identify insurers with the highest claims-paying ability willing to write the business if they have a conflict of interest. 

IB 95-1 sets forth six factors that should be among those that fiduciaries consider in evaluating an annuity provider’s claims-paying ability and creditworthiness: 

1. The quality and diversification of the annuity provider’s investment portfolio. 
2. The size of the insurer relative to the proposed contract. 
3. The level of the insurer’s capital and surplus. 
4. The lines of business of the annuity provider and other indications of an insurer’s exposure to liability. 
5. The structure of the annuity contract and guarantees supporting the annuities, such as the use of separate accounts. 
6. The availability of additional protection through state guaranty associations and the extent of their guarantees.

IB 95-1 recognizes that there may be situations in which it may be in the interest of participants and beneficiaries to purchase other than the safest available annuity, such as: 

• when an annuity is only marginally safer, but disproportionately more expensive than competing annuities, and the participants and beneficiaries are likely to bear a significant portion of that increased cost; or
• when the safest available annuity provider is unable to demonstrate the ability to administer the payment of benefits. 

Still, it notes that increased costs or other considerations can never justify putting the benefits of participants and beneficiaries at risk by purchasing an unsafe annuity.

EBSA Review

EBSA’s review has involved exploration of three general questions: 

1. How IB 95-1 has worked in the experience of the individual stakeholder.
2. Whether the individual stakeholder has suggestions on how the IB should be improved. 
3. Whether the individual stakeholder can identify trends or developments in the pension risk transfer (PRT) annuity purchase market that should be considered by the DOL as part of its review and report to Congress.

EBSA’s Findings

EBSA says that recent market conditions have favorably affected the affordability of de-risking activities regarding plan funding and transaction cost. Further, it says that rising interest rates have made annuity purchase transactions less expensive. 

Stakeholder Meetings

In meetings with stakeholders regarding whether IB 95-1 should be amended, some stakeholders sought little change, contending that it identifies the appropriate considerations for plan fiduciaries and has worked well, and that plan fiduciaries are not likely to have experience or expertise to evaluate some of the complex practices in which insurers engaged.

Others, on the other hand, asserted that significant changes to IB 95-1 are needed to protect annuitants’ interests, while others argued that it should be amended to focus the attention of plan fiduciaries on risks related to the ownership structure of the annuity provider and the extent to which the annuity provider relies upon non-traditional investments and liabilities as well as reinsurance.

Still others supported a middle ground and advocated more targeted changes, such as that (1) IB 95-1 be revised to identify the annuity provider’s administrative capabilities as a consideration and (2) used by the DOL to address the continuation of certain rights provided by ERISA to the individuals who cease to be participants covered under the ERISA plan because of a PRT annuity purchase transaction. 

Among the issues about which stakeholders expressed concern to EBSA were the following. 

• Private equity-owned insurers may not intend to be in the insurance business for the long term, while annuities are long-term commitments.
• Whether the fiduciary selecting an annuity provider under the IB 95-1 standard should limit their review of available capital and surplus to the direct holdings of the insurer, or whether this review should extend to the parent holding company and other affiliates?
• How risky the insurance industry’s investment strategies are in the aggregate.
• How well certain “non-traditional” liabilities being taken on by some insurance companies are appreciated by plan fiduciaries.
• Trends in the life and annuity insurance industry regarding reinsurance.
• The administrative capabilities and experience of the insurer.
• The possible loss of the Internal Revenue Code’s spousal protections—as well as protections under ERISA and the IRC of assignment and alienation provisions—as part of, or following, PRT annuity purchases.
• Potential lack of disclosure as part of partial PRT annuity purchases, so-called lift-outs.
• Disclosures following a PRT annuity purchase.
• The impact of a partial PRT annuity purchase on the residual funding status of the plan after a transfer.

Not all stakeholders had concerns about the adequacy of the IB 95-1, however. For instance, several told EBSA that IB 95-1 already covers the quality and diversification of the investment portfolio, and some who are part of the insurance industry cited the asset mix diversity of their portfolios as providing greater protection to policyholders. Others observed that state regulators closely scrutinize investments and investment portfolios. Still others noted that there have been no investment-related solvency losses to annuitants in PRT annuity purchase transactions.