To Rewrite or Not Rewrite the Pension Risk Transfer Regulations, That is the Question

The U.S. Department of Labor (DOL) may consider amending its nearly three-decade-old guidance for defined benefit pension plans seeking to offload their payment obligations to insurance companies, although it considers this guidance to still be relevant, according to a new report to Congress. This is an important development in light of the increase in the number of pension de-risking transactions, acquisitions by private equity and other firms of stakes in such annuity assets, and concerns by plan participants who have resorted to litigation relating to these acquisitions. Some advocates have recommended that plan fiduciaries be required to focus on the ownership structure of annuity providers and the extent to which the annuity provider relies on nontraditional and potentially riskier investments. 

I. Background

The SECURE 2.0 Act of 2022 directed the DOL to consult with the Advisory Council on Employee Welfare and Pension Benefit Plans (ERISA Advisory Council) to determine whether any amendments to the DOL’s Interpretive Bulletin 95-1 (IB 95-1) are necessary. The DOL originally issued IB 95-1 amid concerns about the claims-paying ability of annuity providers and the fiduciary decision making with respect to pension risk transfer transactions. IB 95-1 sets forth six factors that fiduciaries should consider, among other things, when evaluating an annuity provider’s claims-paying ability and creditworthiness:

• the quality and diversification of the annuity provider’s investment portfolio
• the size of the annuity provider relative to the proposed contract
• the level of the annuity provider’s capital and surplus
• the lines of business of the annuity provider and other indications of their 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

II. DOL’s Conclusions

Based on its review of IB 95-1 and consultation with the ERISA Advisory Council, the Employee Benefits Security Administration (EBSA)— the agency of the DOL responsible for administering, regulating and enforcing the provisions of Title I of the Employee Retirement Income Security Act — confirmed that IB 95-1 identifies broad factors that are relevant to a fiduciary’s prudent and loyal evaluation of an annuity provider’s claims-paying ability and creditworthiness. The EBSA highlighted that the factors enumerated in IB 95-1 are not the only factors for fiduciary consideration and that the factors should be applied based on the individual circumstances of each plan and de-risking transaction.

Ultimately, the EBSA reported that it is not currently prepared to propose amendments to IB 95-1 to address potential risks and concerns raised by stakeholders. However, it found that while amendments to IB 95-1 are not unwarranted, further exploration of developments in the life insurance industry and de-risking transactions is necessary to determine exactly what revision or supplementation of the IB 95-1 factors is needed or whether additional guidance should be developed, thus leaving the door open for possible future changes. 

Sidley Austin will continue to monitor developments related to IB 95-1 and any additional guidance that EBSA or the ERISA Advisory Council issues related to these issues.