Pension De-Risking

Overview

Today, many companies—both large and small—are struggling to meet the growing demands of defined benefit/pension plan obligations. Some sponsors of single-employer defined benefit pension plans have begun identifying ways to reduce exposure to pension plan costs.

Generally referred to as "de-risking," plan sponsors can transfer the risks associated with current and future liabilities to another party—to the participant/worker (in the form of a lump sum), to an insurance company (in the form of a distributed annuity), or both.

Life insurance companies play a role in pension de-risking by providing risk transfer solutions for the plan sponsor along with guaranteed lifetime income for workers. Annuities serve as a defined benefit—guaranteed income for life.

Worker Protections

Workers who receive pension benefits through annuities are protected under the U.S. Department of Labor’s Employee Retirement Income Security Act (ERISA) fiduciary standards, described by courts as the “highest known to the law.”

Workers who received annuities in these transactions not only benefit from the lifetime income, but also from continued spousal and creditor protections carried over from their ERISA-covered plan.

State Regulatory Protections

When pension plan payments are annuitized, the guarantee of payment becomes the obligation of a licensed insurance company that is subject to stringent solvency standards and oversight by state insurance regulators. In addition, all states manage state guaranty funds that are intended to protect promised benefits against the failure of any one insurer.

ACLI Position

Generally, plan sponsors who de-risk are acting on their need to reduce the impact of the volatility of their pension plan obligations on their financial statements and in their funding requirements. In addition, sponsors look to purchase annuities to realize insurance company expertise, efficiency, and the safety it brings to their participants.

Plan sponsors and providers should be able to de-risk without additional administrative or financial burdens. ACLI supports policy that makes it easier for plan sponsors to de-risk and also help plan participants make an informed decision during the transfer process that would lead to a secure retirement.