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.