29 May 2017

SAFE Retirement Act Would Transfer Public Pension Risk To Private Insurers

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Last week, Senator Orrin Hatch (R-UT) introduced the Secure Annuities for Employment (SAFE) Retirement Act of 2013. In the proposed act, risk would shift from public pensions to private insurers with the purchase of deferred annuity contracts.

This is a follow-up to Senator Hatch’s 2012 report concerning the pension debt of state and local defined benefit (DB) pension plans, prepared for the Senate Committee on Finance in January 2012. The report argued that DB pension plan debt placed too great a burden on the sponsors of public pension plans.

The SAFE Retirement Act would provide governmental entities the ability to purchase a deferred annuity contract for every year of service accrued by an employee. The deferred annuity contract would cover the employee’s benefit earned in that year’s accrual and would be purchased annually, thereby completely funding in each year the annually accumulated benefit

This would shift the risk of the pension funding to private insurers and ease the burden of solvency facing many governmental entities. The risks of the deferred annuity, including the investment risk after purchase of the contract as well as the longevity risk of the annuity ultimately being paid, would be borne by the private insurer from whom the contract was purchased. 

Senator Hatch believes DB funding risk would be more appropriately allocated to private insurance companies.  During his speech before the Senate, he noted that the insurance industry has been set up to manage longevity risk and is well-regulated by states, “with stringent reserve requirements and conservative investment standards.”

Some public plan DB pension experts, however, have noted that state insurance regulations may not always be a failsafe against private insurer insolvency. If a private insurer were to go bankrupt, which there have been several cases, the payment of pension benefits could be in jeopardy and fall back on the governmental entity creating a financial crisis.

Another potential issue a SAFE retirement plan might face is an increase in cost to provide DB pensions under the structure. Since capital requirements for insurance companies are much higher than the requirements states and local governmental entities place on themselves, the cost of the deferred annuity contracts could be higher. Additionally, public pensions have more investment flexibility and in many cases tend to provide higher earnings than private insurance companies.

 

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