Pension Recoupment and Pension De-risking

National Retiree Legislative Network – Spring 2023

By Cynthia Hadsell

In this issue, we’ll focus on two issues.  Pension Recoupment and Pension De-risking.

First, Pension Recoupment – recapture of pension overpayments by a company – is now more fair for retirees in the future because of the work of the NRLN. 

I knew this was a big problem for some other companies, but did not realize until recently that it has also happened to our U S West/Qwest retirees. One gentleman was notified he owed tens of thousands of dollars due to many years of overpayments.  He was given ten years to pay back the money. Not his fault! But CenturyLink had the right to collect. If you know of anyone else who has had pension funds “recouped” by CenturyLink, let us know.

Unfortunately, the new ruling is not retroactive. And, if you hear of retirees in the future who are notified of pension overpayments, please contact us and we will direct them to the new information.  For instance, now the rules are that if a pension plan sponsor does recoupment of overpayments, it must be done within three years of initial overpayment; it may not recoup more than 10% of overpayment per year, and it may not recoup against a beneficiary.  This was a big NRLN win at the end of last year.

The second NRLN issue is Pension De-risking – selling pension assets to another company.  Let me be very clear, we have no knowledge of anything like this planned for our company.  However, we must continue to educate ourselves as it is a growing trend.  While it’s “de-risking” for a company, it is a “transfer” of risk onto the retirees. 

There are many consulting and insurance companies out there that meet with chief financial officers to pitch this approach.  It’s a business decision, but currently it is one that needs more guardrails for retirees.  Let’s call our sample company “Acme Consulting.” Here’s what they might say to a corporate CFO:

“Risk is about your future.  Are you balancing pension plan funding, costs, and risk to have an effective risk management strategy?  We can help with that!  Pension de-risking activity has experienced robust growth over the past years.  At “Acme,” we help companies change their defined benefit (DB) funding and risk strategies due to increasing Pension Benefit Guaranty Corporation premiums, capital market conditions, and operational complexities.  As a plan sponsor, don’t you think it is the right time to reduce or eliminate your pension funding shortfalls?  We can help!  We will work with you on this journey!  We believe that engaging the insurer market early will help bring clarity to the potential financial outcomes and sensitivities.  Market and plan dynamics will impact relative pricing.  To efficiently execute when the transaction is most compelling, we help you build the business case and work through the steps in advance.”

Does this give you an idea of what is being aggressively pushed and implemented in many, many corporations?  Again, please, please understand this is not an immediate warning for us.  But it is a call to action to help NRLN push through legislation that will protect our pensions should our company ever make a business decision to de-risk / “transfer risk” our pension funds to an insurance company. 

NRLN is hard at work to put in place rules that would protect retirees caught in this situation.  A White Paper to be used in briefings has been updated and our association helped fund the new version. Below is the language that NRLN and the Pension Rights Center (PRC) propose to better protect retirees.  Yes – it reads like a fine print mortgage contract, but it takes that legal language to make the changes we need, again only IF our pensions are ever sold to an insurance company.

If pensions are transferred to an insurance company, the most significant concern to a pensioner is the loss of the protection of federal Pension Benefit Guaranty Corporation (PBGC) insurance that guarantees the payment of a monthly benefit for life (up to the statutory maximum). 

NRLN determined that the best solution is a legislative amendment to Section 404 of the Employee Retirement Income Security Act (ERISA).  The new language would require a company to include provisions in the contract at the time of transfer to better protect the pensioner if the insurance company became bankrupt.

NRLN and the PRC drafted an amendment.  Now NRLN is working to convince Congress to enact the amendment.  It would most likely take the form of a new subsection 404(f) in ERISA, and reads as follows:

Section 404(f) Safe Harbor for Annuity Selection—single-employer plan

(1) In general
With respect to the selection of an insurer for a guaranteed retirement income contract that is distributed to a single employer plan participant, or group of participants, the requirements of subsection (a)(1)(B) will be deemed to be satisfied if a fiduciary —
(A) meets the requirements of subsection (e)(1) and (2);
(B) The terms of the guaranteed retirement income contract reasonably replicate ERISA participant protections such that any annuity contract that is distributed and not retained as an asset of a plan.

(2) Protections included in distributed annuity contracts
With respect to the purchase of a guaranteed retirement income contracts that is distributed to a single employer plan participant, or group of participants, a fiduciary shall ensure that such contracts—

(A) require the annuity provider to purchase a contract of reinsurance that is sufficient to provide a replacement annuity of equal value from a third-party insurer that is independent of the annuity provider and financially capable, as provided under subsection (e)(2); and

(B) include provisions that—

i. prohibit an insurer from offering to convert or exchange the contract for a lump sum or other change in the form of benefit;

ii. prohibit the sale or transfer of all or a portion of the annuity contracts to an entity that is not a state-licensed insurance company with an above average financial risk rating;

iii. require the annuity provider to send an annual report to annuitants that confirms the reinsurance provider and the current rating and financial status of the annuity provider and of the reinsurer;

iv. prohibits the assessment of fees against the annuitant by the annuity provider;

v. prohibits the annuity provider from reducing the benefit amount transferred from the plan to the annuity provider, including to correct a miscalculation of the benefit transferred to the annuity provider;

vi. establish a claim and appeals procedure for annuitants that conforms to the claims and appeals procedure under ERISA;

vii. comply with Department of Labor regulations or other guidance designed to ensure that a participant’s rights under ERISA are not reduced or impaired by a fiduciary’s purchase and distribution of a guaranteed retirement income contract to a plan participant or beneficiary.

(3) Impact on funded status of the plan
If the guaranteed retirement income contract is not distributed to plan participants and beneficiaries as part of a voluntary plan termination, the plan fiduciary must attest that the transfer of plan assets and liabilities to the insurer does not substantially impair the funded status of the plan, based on a standard to be promulgated by the Secretary of Labor in consultation with the Secretary of the Treasury.

(4) Definitions
For purposes of this subsection—
(A) Insurer. The term “insurer” means an insurance company, insurance service, or insurance organization, including affiliates of such companies.
(B) Guaranteed retirement income contract. The term “guaranteed retirement income contract” means an annuity contract for a fixed term, or a contract (or provision or feature thereof), which provides guaranteed benefits annually (or more frequently) for at least the remainder of the life of the participant, or the joint lives of the participant and the participant’s designated beneficiary, that is distributed to a single-employer plan participant or beneficiary.

If you are a member of the CenturyLink Retirees you are a member of NRLN through your membership in this association.  Many of you also make private donations to NRLN.  Your money is going to good use!  We’re only a few months into this congressional session.  We’ll keep you updated and hope to report progress on this and many other topics. Thank you for your interest in these issues!

Categories: NRLN News

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