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COLI Provisions Added To Senate Pension Legislation

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COLI Provisions Added To Senate Pension Legislation Language codifies ground rules for sale of COLI

By Arthur D. Postal


Legislation was introduced last week by the bipartisan leadership of the Senate Financial Services Committee that will codify ground rules for the sale of corporate-owned life insurance.

The COLI provisions were added to legislation designed to shore up the nations troubled private pension plan system.

The legislation also contains an investment advice provision supported by Sen. Jeff Bingaman, D-N.M., that is different from the one the industry desires.

Jack Dolan, an American Council of Life Insurers spokesman, said life insurers are cool to Bingamans proposal because they believe it would deprive agents and other company representatives from providing advice at the worksite.

Instead, Dolan said the trade group and other insurers will push alternative investment advice legislation that contains no restrictions on advice giving by representatives of insurers or other financial institutions that are providing services to a pension plan.

“We believe the best investment advice bill would be one allowing companies that already are providing pension plans and educational materials to employees to also be allowed to provide advice.” Dolan said. “It is abundantly clear that employees want and need assistance in retirement planning, and we are hoping to provide it.”

Dolan added that panel staffers indicated they are open to changes in specific provisions, if appropriate.

Another provision that would facilitate growth of plan assets, many of which are administered by insurers, would allow participants in 401(k) or similar plans in troubled companies to contribute “catch-up” payments to an IRA if the troubled employer matches the contribution. The bill also contains easier portability rules.

The legislation, called the National Employee Savings and Trust Equity Guarantee (NESTEG) Act, was introduced by Sens. Charles Grassley, R-Iowa, and Max Baucus, D-Mont., chairman and ranking minority member, respectively, of the panel, and is similar to a bill introduced last year.

It gives the life industry a good head start on Capitol Hill toward making existing products even more saleable and perhaps later in the year getting even more products.

The latter stems from comments by Grassley and Baucus in introducing the legislation that this is just the start. They said they expect the committee to consider additional ways to shore up existing pension plans during the year, and also to look for “new, innovative ways to increase savings.”

“We all know Americans should be saving more,” Grassley said. “There are a lot of creative ideas out there for boosting savings, and I look forward to working with members of the Finance Committee on ways to do that.” Baucus added, “We all agree on the need for a real increase in retirement savings. I am committed to developing ways to creating new savings, and help Americans look forward to a more secure retirement.”

However, the “engine” for all this was language to restore the solvency for the Pension Benefit Guaranty Corporation, whose deficit has increased from $11 billion to $23 billion in the course of a year, and which was in surplus as late as 2001.

Lynn Dudley, vice president and senior counsel of the American Benefits Council, said the legislation does this by changing the accounting for maintaining the solvency of a defined benefit plan to mandate that funds must be contributed as if assuming the fund will terminate at the end of every year. Current accounting rules mandate that contributions should be made based on the assumption that the plan is ongoing. The concern of ABC members, Dudley said, “is that this may impose too great an annual contribution on them, and force them out of the system.”

The big coup for the industry is that the bill contains the same language agreed to last February by the Finance panel regarding COLI, a profitable product for many life insurance companies.

It codifies a number of provisions contained in industry “best practices” guidelines for the sale of the product, which many Democrats on both sides of the Hill said last year they would like to see outlawed.

It is even more so now, industry officials say, because nonqualified deferred compensation plans were made more attractive when Congress passed a law last November establishing clear guidelines for their use. Another factor is that in the wake of Enron and other corporate failures, top executives are demanding that their nonqualified plans be funded as they are earned. And COLI is a primary product used to fund these plans.

Specifically, the COLI sale guidelines outlined in the legislation include a consent requirement under which all employees to be insured under a COLI policy payable to the company receive a written notice of the coverage, including notice that the coverage may continue even if the insured terminates employment.

In addition, prior to being insured, employees will be required to give their written consent. In written comments on the provision to the committee last year, the insurance industry said, “These notice and consent provisions provide uniform protections for all employees to be covered under a COLI policy; for the first time, there will be a national standard for employee notice and consent.”

The provision was contained in similar legislation that passed the panel last year but failed to make headway in the House.

Reproduced from National Underwriter Edition, April 29, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.


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