Terminated Defined Benefit Plan

[nancy]

What happens if a terminating defined benefit plan satisfies retired lives liability with the purchase of annuities and the insurance company subsequently goes bankrupt? Do the payments to the retirees continue at some level?

[jpod]

What happens is that some people may get sued by former participants.

If this was an ERISA/PBGC-governed plan, and if the persons involved in selecting the insurance company were prudent and diligent in their selection process, and if the pension plan document does not provide for any further relief, the sad answer (for them) is that the participants have no recourse against anyone other than the insurance company and state insurance guarantee funds.

But, naturally, the circumstances are such that some participants may be inclined to at least consider suing the persons involved in the termination process and selecting the insurance company for breach of fiduciary duty, and/or try to get the U.S. Department of Labor to investigate the matter.

[mbozek]

All states except LA have some form of guarantee fund to pay annuity benefits in the event of the insolvency of an insurer although the strength of the guarantees varies -- for example NY has a very good law requiring all life insurers to contribute to restoring the guaranteed annuity benefits promised by a insolvent carrier.

It not clear that there would be no recourse against the PBGC. While the PBGC claimed that it had no liability to provide benefits to participants in terminated plans after Executive life and Mutual benefit life went under, neither the statute or the legislative history of ERISA confirms such a position. (Title IV of ERISA requires that that all vested retirement benefits guaranteed by a DB plan are to be covered to the extent of the insurance limitations for benefits. There is no statutory exclusion from title IV for DB benefits provided under terminated plans. Also PBGC premiums were paid for benefits accrued under terminated plans and no refund is given when the plan terminates.) The issue was never tested because the participants who received annuities from insolvent insurers eventually were paid the benefits under either the gurantee funds or the insurer came out of insolvency.

[MGB]

I thought the final Executive Life payout averaged about 70% for annuitants, inclusive of guarantee funds. Actually, California did not have a guarantee fund when Executive Life went under (a large portion of their business was there because they were based in Beverly Hills). Later legislation applied some amount of the new guarantee fund retroactively.

I recall my examination of a few states (some of the better ones) end up with a major problem with terminated plans. The issue is the maximum guarantee. It applies on a per-contract basis and the entire group annuity purchase is one contract. So, if you have 1000 participants with annuities coming, a $30,000 (or whatever) per contract guarantee doesn't go far.

[mbozek]

There was more than one exec life co. Exec Life of NY paid out almost all of the annuity liabilities because it was subject to NY law. I dont remember what the settlment was for exec. life of Cal. You are correct in that there are limits on the state guarantees similar to maximum benfit guarantees of the PBGC.

[MGB]

The point is that the maximum is NOT similar to the PBGC maximum. The PBGC maximum is per annuitant. State insurance funds' maximums are per contract. A plan has only one contract when they terminate the plan. So the fixed dollar amount (that is present value, not an annuity amount) is spread across all participants under one group annuity contract. In a 1000 life case, that may be a total of less than $100 each (present value, not annuity amount).