The private insurers in the group annuity market are taking paying pension guarantee customers away from the Pension Benefit Guaranty Corp. (PBGC)
Gene Dodaro, the comptroller general of the United States, talked, briefly, about the competition between the PBGC and the private “pension risk transfer” market Wednesday, at a hearing on financial security in retirement that was organized by the Senate Special Committee on Aging.
Dodaro was the only hearing witness who mentioned annuities in the written version of the testimonies posted on the committee website.
Dodaro — who serves as the head of the U.S. Government Accountability Office (GAO), an agency that helps Congress keep tabs on what’s happening at federal agencies and in federal programs — mentioned the private risk transfer market while discussing the challenges facing the PBGC.
The PBGC is an entity that’s supposed to use premiums from private employers with defined benefit pension plans, and the assets of failed plans, to back up pension plan benefits guarantees.
The PBGC has $110 billion in assets, but “its pension benefit guarantees are increasingly at risk due to its substantial liabilities,” Dodaro said, according to the written version of his remarks.
The PBGC reached Sept. 30, 2018 — the end of the federal government’s 2018 fiscal year — with a net accumulated financial deficit of about $51 billion, and about $185 billion in exposure to future losses on underfunded pension plans, Dodaro said.
Insurers and the PBGC’s Covered Lives
“The primary drivers of the government’s fiscal exposure related to PBGC’s deficit are the collective financial risk of the many underfunded pension plans insured by PBGC and the long-term decline in the number of participants covered by traditional [defined benefit] plans,” Dodaro said.
The number of plans insured has dropped by 78% since 1985, and the number of PBGC-insured pension plan participants who are still working has dropped by 13 million, Dodaro said.
“There has also been a recent trend of single-employer plan sponsors transferring the liability for some of their participants to insurance companies via group annuity ‘buy-outs,’” Dodaro said, referring to the arrangements also known as pension risk transfers.
Insurers may say that pension risk transfer deals reduce PBGC exposure to losses on underfunded pension plans as well as PBGC premium revenue.
But, from the perspective of the GAO, the arrangements do reduce the number of participants in PBGC-covered plans, Dodaro said.
“As a result of these trends, even though PBGC premium rates have increased significantly in recent years, PBGC’s premium base has been eroding over time as fewer sponsors are paying premiums for fewer participants,” Dodaro said.
Dodaro also talked, briefly, about the fact that many participants in both defined benefit pension plans and defined contribution plans end up getting the accumulated value in the form of a lump sum, or big, one-time payment, rather than in the form of an annuity, or an arrangement to make a stream of income payments.
When pension plan participants get lump-sum payments, rather than lifetime income options or other methods for withdrawing funds in a systematic way, “the participant may face challenges similar to those with [defined contribution] accounts in terms of managing the spend down of their retirement savings,” Dodaro said.
Three Shaky Pillars
Dodaro described Social Security, employer-sponsored retirement plans and personal savings as the three pillars of the U.S. retirement system.
He said that, in addition to threats to their ability to draw on employer-sponsored retirement plans, American workers face many other threats to their post-retirement financial security, such as a low average savings rate, and the possibility that Social Security may end up paying only 77% of the scheduled benefits.
“Over the past 40 years, the nation has taken an incremental approach to addressing the U.S. retirement system; however, such an approach may not be able to effectively address the interrelated foundational nature of the challenges facing the system today,” Dodaro said. “Without a more comprehensive re-evaluation of the myriad challenges across all three pillars of the retirement system, identifying effective, enduring solutions may be difficult, and the consequences could be significant. Unless timely action is taken, many older Americans risk not having sufficient means for a secure and dignified retirement in the future.”
Links to hearing resources, including the written versions of the testimonies and a video recording, are available here.
— Read Meet Your Multiemployer Pension Nightmare: Actuary to Lawmakers, on ThinkAdvisor.