In 1991, Executive Life Insurance Company’s bankruptcy caused significant cuts in pensions for retirees of companies who had transferred their pension obligations to the company. Two decades later, GM and Verizon began a trend in which over $300 billion in retiree assets have been offloaded to insurance annuity providers and private equity investors. With many corporate defined benefit plans in the U.S. now showing surpluses due to higher interest rates and stock market gains, companies are terminating their pension plans and replacing them with annuities, making the transfer profitable.
Recently, Verizon completed a $5.9 billion transfer of 56,000 pensions to group insurance annuities with Prudential Insurance company and RGA. AT&T also de-risked their pension obligations in an $8 billion transaction involving 96,000 retirees and beneficiaries. However, despite assurances from the companies that the shift will not put their pensions at risk, retirees from both companies are fighting back, with Verizon retirees protesting their contracts being sold to Prudential Financial Inc. and RGA and AT&T retirees filing lawsuits alleging violations of ERISA requirements.
The choices of annuity providers by companies like AT&T have raised concerns, as some providers have risky portfolios and affiliations with private equity firms. De-risking can also result in losses for workers and retirees, as there is no possibility of pension improvements like cost-of-living bumps after the transfer. Additionally, the practice of de-risking allows companies to capture all profits from the pension assets, rather than sharing them with workers as would have been done in the past.
The total U.S. pension risk transfer premium has been increasing, with more contracts being completed each year. However, de-risking can pose risks for workers and retirees, as they lose the advantage of having a guaranteed annuity for life through a defined benefit plan. The American Council of Life Insurers defends the strength of the insurance companies backing these transfer contracts, but concerns remain about the potential impact on workers and retirees.
Pension de-risking carries echoes of past tragedies, such as the termination of the Studebaker employee pension plan in 1963, which left over 4,000 auto workers without their promised benefits. The establishment of the PBGC was a response to such losses, but the trend of de-risking raises fears that history may repeat itself in terms of pension instability and insecurity for workers and retirees.
