The Pension Benefit Guaranty Corporation has long held that once a pension is converted to an annuity, federal protections no longer apply. But that wasn’t always the case.
In fact, the law firm Ivins, Phillips & Barker argues that the government agency once took the exact opposite position. Back in 1981, PBGC stated clearly that its insurance would cover retirees even if the annuity provider failed. A decade later, that stance quietly changed.
“A lot of people don't realize the history of the PBGC guarantee position when it comes to covering annuity closeouts,” Kevin O’Brien, an ERISA attorney with IPB, told Institutional Investor. “And it got me to thinking: So, why did they change it, and how did it come about?”
So, the more O’Brien dug into the PBGC’s position change, the more surprised at “how skimpy their argument was.”
As O’Brien reads the statute, the PBGC should continue to guarantee the benefit against insurance company failures, with nothing to suggest it only guarantees “against benefit losses that are materialized as of the date of plan termination, which seems to be what they were articulating in 1991 when they changed their position.”
The ERISA lawyer argues that the federal government is still on the hook to provide protection even if the pension has been converted into an annuity. “I think the ‘annuity-provided benefits’ are benefits under the plan, which is what they guarantee at plan termination,” O’Brien said. “That doesn't say that the loss of benefits has to be materialized on the date of plan termination. How can there be benefits under the plan for one section but not the other?”
This led him and fellow IPB ERISA attorney Spencer Walters to write a paper challenging the PBGC's decades-old position that retirees lose federal protection once pensions are converted to annuities. In it, they argue that its position since 1991 contradicts the PBGC’s statute, legislative history, and its own original interpretation.
In their paper, O’Brien and Walters argue that the current stance — “that PBGC guarantees end when a pension plan distributes an annuity contract” — is unsupported by statute. They contend that existing law provides for those guarantees to continue even after benefits are transferred to a private insurer.
They trace how, in 1981, the PBGC clearly stated, in both its regulations and a Federal Register preamble, that if an annuity provider fails, its insurance protects against benefit losses. But a full year before the PBGC changed its position in 1991, it had twice sought — and both times failed to receive — legislative relief against providing coverage.
“It was clear that PBGC established a position in 1981 but tried to walk away from their position,” O’Brien said, noting that when the PBGC sought legislative relief in 1983 and 1985, the U.S. was undergoing the savings and loan crisis.
So, after the Supreme Court overturned the Chevron deference standard last year, he and Spencer think the PBGC's reversal of its 1981 position is susceptible to challenge. “The PBGC was created to protect pensions,” they wrote. “Returning to the original 1981 position better aligns the PBGC to its statutory purpose.”
As O’Brien explained to II: “It has obvious implications for the current lawsuits involving annuitizations… and this issue of whether or not the PBGC guarantees are lost at an annuitization has turned to be a key issue that fuels those cases.” The PBGC declined to comment.
