The subject of pension de-risking continues to receive considerable attention.  Last week, the ERISA Advisory Council waded into the issue, holding a hearing on “Private Sector Pension De-risking and Participant Protections.”  The Council, which advises the Secretary of Labor on the Labor Department’s administration of ERISA, is examining the ways in which employers de-risk pension obligations, the legal constraints on these strategies, and whether the Labor Department should revise any current guidance or issue any new guidance addressing pension de-risking.

The Council first heard testimony from Joe Canary of the Department of Labor.  Mr. Canary noted two areas of particular concern for the Department regarding pension de-risking:

• The Department is concerned about participant disclosure and whether employers inappropriately encourage employees to take lump sums to meet the employers’ objectives of settling liabilities; and
• The Department has been focusing on making lifetime income options available, and, while this effort has been largely focused on defined contribution plans, the same policy issues could apply in the context of lump sum offers from defined benefit plans as well.

Next, the Council heard testimony from Robert Newman of Covington & Burling LLP.  He provided an overview of pension de-risking and the legal framework in which it occurs. He explained that an employer’s ability to de-risk pension liabilities is essential to the retirement system:

 “The foundation of the employer-provided retirement system is its voluntariness.  Nothing underscores this feature more than an employer’s ability to leave it.  But, beyond merely being able to leave the system, de-risking can help an employer maintain a defined benefit plan. . . . The financial volatility associated with sponsoring a defined benefit plan stems largely from legacy liabilities.  If an employer can ‘de-risk’ the legacy liabilities, the employer need only manage its on-going (or normal) pension costs.  In this manner, de-risking in essence can place defined benefit plans on the same footing as defined contribution plans:  in both cases, the retirement plan’s demands on the employer relate primarily to funding on-going accruals.”

Robert Newman then outlined the principal strategies for pension de-risking, including in-plan strategies (such as hedging, immunization, and annuity purchases) and settlement strategies (such as lump sum offers, distribution of annuity certificates, and plan termination), and the legal constraints for each strategy.

Several other witnesses also testified before the Council.  The Council heard testimony regarding the financial and actuarial aspects of pension de-risking and the conditions under which lump sum offers may be attractive to employers from a financial perspective.  Several Council members expressed concern regarding lump sum offers, especially offers to retirees, and asked witnesses whether a retiree would accept a lump sum offer when an annuity would be more favorable to the retiree.  One witness, Jack Cohen, testified on behalf of the Association of BellTel Retirees and told the Council that he believes retirees should be permitted to make their own decisions about whether to accept a lump sum offer.

Council members asked witnesses how employers could fulfill fiduciary obligations while pursuing their own objectives as plan settlors.  Witnesses noted that ERISA permits employers to wear two hats, acting in some cases as plan settlor and in others as plan fiduciary.  Nonetheless, a witness from the Communication Workers of America recommended that employers be required to retain an independent fiduciary to act solely on behalf of plan participants in a de-risking transaction.

A representative from the U.S. Government Accountability Office (GAO) spoke briefly at the end of the day to inform the Council that the GAO has been asked to study pension de-risking and is currently conducting this study.