The report recognizes that there have been considerable changes in the life insurance industry and pension-risk transfer practices since 1995, when the IB was issued, and that further exploration into developments in these areas is necessary to determine whether the IB’s factors need revision or supplementation and whether additional guidance is needed. It also concluded that guidance should remain based on principles.

Background

IB 95-1 provides guidance on the ERISA fiduciary duties as applied to the selection of an annuity provider for the purpose of distributing benefits under a DB pension plan. Plan fiduciaries make such purchases to terminate a fully funded plan in a standard termination. They also make smaller annuity purchases to de-risk the plan. These are often referred to as “pension risk transfers” because they transfer the liability for payment from the plan to the annuity provider.

Generally, IB-95 requires fiduciaries to purchase the safest annuity available unless it would be in the interest of participants and beneficiaries for the fiduciary not to do so. While the decision to purchase annuities is generally a settlor function, the implementation of that decision is a fiduciary action and therefore subject to the fiduciary rules of ERISA.

The IB sets forth six factors that fiduciaries should consider:

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

These factors are not the only ones that should be considered, and there is no requirement that they be given equal weight. The emphasis on specific factors depends on the individual situation.

The IB recognizes that the hiring of an independent fiduciary in certain cases may be necessary. It also recognizes that more than one annuity provider may be able to offer the safest annuity.

The number and use of pension risk transfers have grown considerably since 1995.

The SECURE 2.0 Act of 2022 (SECURE 2.0) instructed the DOL to review IB 95-1 and, after consultation with the Department’s Advisory Council on Employee Welfare and Pension Benefit Plans (ERISA Advisory Council), determine whether amendments to the IB are warranted.

The DOL report

The DOL report identifies some of the reasons for increased use of pension risk transfers. These include reducing the cost of the plan by reducing volatility and by eliminating the PBGC per-head premium.

The report notes that participant groups have been mainly focused on how safe pensions are after the plan purchases an annuity. They point out that private equity companies, which generally take on large amounts of debt and are not likely to be long-term investors, are purchasing or investing in insurance companies or are entering into contracts to manage insurance company investments to an increasing extent. The groups are concerned also by the lack of transparency about company structures. Another concern is the type of investments that these private equity owned insurance companies may make in the pursuit of higher returns, specifically identifying collateralized loan obligations.

There is also an increase in the use of offshore reinsurers by the insurance companies. Participant groups are concerned that these offshore reinsurers are subject to less oversight; thereby, putting pensions at risk.

Additionally, participant groups are concerned that moving protection of pensions from the PBGC to the insurance industry puts the pensioner at greater risk of not receiving their entire pension promise. On the other hand, pension sponsors believe that the insurance industry offers equal, if not more, protection to participants.

Participant groups believe that IB 95-1 should identify all of these as concerns that the fiduciary must consider on deciding on the safest available provider.

The DOL’s conclusion

The DOL believes further study is needed before it proposes amendments to IB 95-1. It points out the complexity of the issues and the lack of consensus. To avoid unanticipated consequences, the DOL believes broader public input is the next step. The DOL will consider the impact on participants of annuity purchases and whether there is a need for increased disclosure at the time of the purchase.

The DOL rejects the view that the settlor’s decision to engage in a pension risk transfer means that the plan fiduciary, in implementing that decision, may be indifferent to the loss of PBGC coverage or the extent of the state guarantees.

It also is not persuaded that additional guidance is needed regarding a fiduciary’s duties in connection with a partial buyout’s impact on the plan’s funding status. The fiduciary implementing a buyout already must be concerned about the impact on the benefits of remaining participants and may already be required to seek additional funds from the sponsor.

Next steps

It is not likely that changes to IB 95-1 will come quickly. However, even without a revised IB 95-1, fiduciaries should consider how relevant they believe the concerns raised in the study are and act accordingly when deciding on an annuity provider.