How pension de-risking could strike a devastating financial blow to America's retirees

By Don Kaufmann

By shifting pension obligations to insurers, companies bear less financial risk - but their former workers bear more

This article is reprinted by permission from NextAvenue.org.

Lax regulation on Capitol Hill. Risky behavior by Wall Street. Everyday Americans going about their business, trusting their money will be just fine.

Sound familiar?

Americans have long had an unfortunate habit of reacting to crises instead of anticipating them. When it comes to corporate malfeasance, that tendency cost the country dearly in the 2007-09 recession of 2008 - and unless we take a stand now, it could soon strike a cruel blow to the swelling ranks of American retirees.

Here's the big problem not being confronted: Insurance contracts are self-regulated by 50 different state jurisdictions, leaving them relatively free from any regulatory reign at all.

The creeping threat at hand is called pension de-risking. It occurs when corporations decide to absolve themselves of the fiduciary responsibility to deliver the retirement income promised by the defined-benefit pension plans they created years ago. They do so by transferring the obligations to insurance providers, private-equity funds or other financial investors.

Pension guarantees go out the window

At first, the de-risking trend was framed by corporations as a reasonable way to guard against fluctuating interest rates and market volatility that could potentially alter their balance sheet obligations. They would simply transfer their pension obligations to entities that would continue paying them out to retirees.

If you are 72 years old and your annual pension is $30,000, after 10 years you and your spouse are out of luck.

But pension de-risking, also known as pension stripping, is not simply an administrative exercise that changes where a retiree's earned pension payments come from. It permits retirement assets to be transferred across industries, like poker chips at a casino.

General Motors (GM) and Verizon (VZ) started the de-risking trend in 2012 when they replaced all or part of their pension obligations with annuities issued under group annuity contracts. The deal was the largest to date, with the automaker paying Prudential Insurance Co. of America (PRU) $29 billion to take those pensions off its balance sheet.

Plus: How a scam artist stole an eye-popping $50 million from elderly people, $30 at a time

A list of corporate de-riskers

Meanwhile, I was one of the 41,000 Verizon managers whose pensions were transferred to Prudential in a $7.5 billion deal that same year. Fortunately, Prudential has maintained promised payments and followed through on its responsibilities to retirees.

In the decade since our pension assets were stripped away, millions of retirees have been similarly cast off without our consent or advance knowledge. Ford (F), Dow Dupont, Federal Express (FDX), JC Penney, Lockheed Martin (LMT) and the New York Times Co. (NYT) are some of the hundreds of companies that have transferred their pension obligations to insurance companies. Pension de-risking transfers in 2019 and 2020 each exceeded $25 billion.

Here's the big problem not being confronted: Insurance contracts are self-regulated by 50 different state jurisdictions, leaving them relatively free from any regulatory reign at all.

The Employee Retirement Income Security Act of 1974 (ERISA), a safety net intended by Congress to spare older Americans from corporate and financial predators' malfeasance with our precious retirement assets, no longer applies once a pension is de-risked.

Even worse, the Pension Benefit Guaranty Corporation (PBGC), established by ERISA as a backstop to protect older Americans, is out the window as well.

Until 1974, there were few protections for retiree pensions. When the Studebaker company of South Bend, Indiana, terminated its employee pension plan in 1963, more than 4,000 auto workers lost nearly all of their promised pension plan benefits with no recourse. It was a narrative that happened again and again, so Congress and the White House acted.

Read: 3M's CEO is in line for a $26 million pension - as company freezes the plan for employees

Stripping the safety net, too

According to the PBGC, some 920,000 retirees in more than 5,000 failed plans currently receive pension benefits from the PBGC, with an additional 473,000 workers from failed plans to receive their benefits when they retire.

The Employee Retirement Income Security Act of 1974 no longer applies once a pension is de-risked.

Among the companies terminating pension plans and turning them over to the PBGC are Sears, with 90,000 beneficiaries; United Airlines (UAL), which in 2005 had a $7 billion pension obligation; and Bethlehem Steel, which had a $3.7 billion retiree pension plan.

Yet, somehow, along the way corporate and insurance industry leaders found a new loophole to strip away those retirees' ERISA and PBGC protections. It leaves tens of millions of older Americans exposed to destitution if a financial calamity were to befall one of the massive pension annuity issuers.

Financial failures to keep in mind

Let us not forget the 2023 collapse of supposedly rock-solid banks: Silicon Valley, Signature and First Republic (FRCB) . Before they crumbled, Lehman Brothers, Bear Stearns and AIG (AIG) turned to dust. When institutions like these topple, it's often due to celebrated greed or unrecognized fraud coupled with a lack of transparency, as occurred in the collapse of Enron or Madoff Securities.

From the archives (March 2023): How Silicon Valley Bank Collapsed in 36 Hours

If the insurers now holding retirees' pension assets go insolvent, their limit on lifetime replacement payments in most states tops out at $300,000. If you are 72 years old and your annual pension is $30,000, after 10 years you and your spouse are out of luck. If you have a $50,000 annual pension, you have only six years before needing to find work at the local fast-food chain.

More concerning is that insurance companies can, and often do, subsequently transfer both assets and liabilities to affiliated offshore entities and private equity partners. That can result in a retiree's pension assets being controlled by firms and managers they do not know, and who are typically compensated to look after their own short-term profit.

Read: The Social Security crisis is a bipartisan outrage - and it's way worse than Lehman Brothers

Losing track of my pension

These companies' clout and control over a quarter-trillion of retirees' pension assets is exploding. Do they have the financial capability and fiduciary duty to continue making payments for the coming 20 to 30 years of our lives?

It's why a bipartisan federal law, the 2022 Secure Act 2.0, is so critical for all retirees today. It requires the U.S. Department of Labor to seriously evaluate the negative impacts of pension stripping.

It's also why last summer, I testified to the Department of Labor's ERISA Advisory Council. Others should do so too.

I worked for 30 years to earn my pension and my interests are simple: I and millions of other retirees whose pension assets have already been de-risked need ERISA and PBCG protections or something comparable. Secure 2.0 was passed to protect older Americans who need this protection.

Older Americans have witnessed carelessness on Wall Street before, and we saw that passive compliance led us down a bad road. It's time to ward off the next crisis before it develops. It's time to end corporate circumvention of laws intended to shield retirees from financial distress.

Born and raised in Philadelphia, Don Kaufmann is a board member of the nonprofit Association of BellTel Retirees. An engineer and division manager for AT&T, he spent a combined 30 years with the company that eventually became Verizon after antitrust regulators broke up the Bell system in 1984. Verizon spun off his pension and those of 41,000 of his fellow retirees in 2012.

This article is reprinted by permission from NextAvenue.org, (c)2024 Twin Cities Public Television, Inc. All rights reserved.

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-Don Kaufmann

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