Executive Life’s Fall Stirs Call to Protect Pensions
As the drama and devastation from the biggest failure of a U.S. life insurance company plays itself out in courtrooms nationwide, the push to provide stronger protection for workers and retirees is gaining steam.
The action spurred by the collapse of Executive Life Insurance Co. is coming on a variety of fronts. Members of Congress are putting forth plans to create national standards for maintaining the financial strength of insurers--or even creating a national insurance regulator--to replace the much-criticized and inconsistent state-by-state system that now monitors the industry.
Government officials overseeing pension plans are also taking steps to restrict companies from backing retirement programs with annuities issued by less-than-stellar firms. In particular, these regulators have recently narrowed their interpretation of a “responsible” insurer.
At the same time, the U.S. Department of Labor is widening its push to pressure corporations into taking greater care with their workers’ pensions. In addition to suing two companies last week for improperly replacing traditional pension programs with Executive Life annuities, the Labor Department has sent threatening letters to other firms that have pensions backed by dubious insurers.
Assistant Secretary of Labor David G. Ball readily admits that these moves should spur a “flight to quality” that will result in corporations only buying annuities from the strongest insurers in the industry.
The flight may already have begun. An industry official remarked ruefully: “All across the country you hear the sound of file drawers being opened and phones being dialed as managers check their annuities and call their insurance brokers.”
Many experts have warned of the dangers to consumers caused by an increasing number of insurance company failures and the growing reliance on insurance annuities to back pension plans. But they say it took a disaster like Executive Life to actually cause these warnings to be heeded.
Insurance companies are regulated by state law that is enforced by each state’s insurance authorities, while pension plans are governed both by the federal Employee Retirement Income Security Act (ERISA) and the rules of the Pension Benefit Guarantee Corporation.
Similar congressional proposals to better regulate the insurance industry have failed in the past following heavy lobbying by insurers, but the efforts are gaining support now because of the attention focused on Executive Life.
Rep. John D. Dingell (D-Mich.) plans to introduce a bill that would address the inadequacies of the current system of state regulation for insurers and the rising incidence of insurance company failures. An aide to Dingell would not reveal details of the package, but industry experts believe it is likely to include some form of investment requirements for insurers.
In addition, some major American corporations are reviewing their in-house benefit programs to ensure that they adequately communicate the risks and rewards of various employee-directed retirement programs. Xerox Corp., for example, has taken steps to more accurately describe pension options so that employees will be fully aware of how their money is invested.
But the “flight to quality” and calls for tougher regulation frighten the insurance industry, as executives at all but a few companies ponder a potential stampede of lost business.
“Scores and perhaps hundreds of companies that do not have (the highest) ratings are very sound companies,” said Gene Grabowski, a spokesman for the American Council of Life Insurance. “It would have a chilling effect on doing business for a lot of good companies.”
Executive Life, a Los Angeles insurer with $10 billion in assets, was seized by state regulators last April when a souring portfolio of junk bonds and huge net losses precipitated the insurance equivalent of a run on the bank. The pensions of thousands of retirees nationwide are hanging in the balance.
Regulators now are making only limited payments to current retirees who are covered by the ailing firm. And there is some question as to whether workers at companies that purchased certain Executive Life products--many of which back pension plans--will get any money at all.
“The pension industry and the agencies that regulate it are so aware of this issue right now that they are doing everything possible to ensure that it never happens again,” said C. Frederick Reish, a Los Angeles lawyer and pension specialist. “It is like the aftermath of a plane crash. . . . People become afraid to fly. But actually, I think there’s probably no better time to fly because suddenly everybody is on their toes.”
Last week, the Labor Department sued two California companies--Pacific Lumber Co. and MagneTek Inc.--which had shifted employee retirement dollars into Executive Life annuities. The companies acted “imprudently” and must make up any losses suffered by retirees because of the financial woes of Executive Life, the Labor Department said in its suits.
Other companies touched by the state takeover of Executive Life have not been sued, Ball said. But he said these firms had better give “serious” thought to making up any policyholder losses as a result of Executive Life’s seizure. “Otherwise, they’ll be hearing from us,” he said.
And the ripples spread far beyond Executive Life. The Labor Department also notified other companies that the annuities they picked to replace their pension plans were dubious.
These firms “purchased annuities from third-rate carriers,” Ball said in an interview. These insurance companies are solvent and paying 100% of the pension obligations. “But they are not the safest available annuities, and at the time of purchase, the employer knew that,” he added.
Some industry experts note that government regulations had actually pushed pension fund managers to buy insurance from riskier carriers.
Here’s why: Under current rules, companies may terminate traditional pension programs if the plan has sufficient assets to pay all the benefits promised to future retirees. According to a study by the congressional Joint Committee on Taxation, the law encourages companies to satisfy these obligations by purchasing insurance annuities.
However, pension laws also require companies to “bid out” this business and accept “the lowest responsible offer,” Reish said. In other words, companies are required to buy the annuity that costs them the least amount for the benefits provided, assuming that the insurer making the offer is a “responsible” company likely to pay its debts.
That pushes plan managers to firms like Executive Life, which was once highly rated by the three most respected industry rating services and offered very favorable rates.
The Labor Department actions do not change the letter of the law, but they seem to be altering its spirit, pension experts maintain. In the future, many believe that companies will be far more particular about the insurers they consider responsible enough to do business with.
Ball and others predict that nervous employers will rush to get the safest possible insurance annuities for their pension plans. Insurance companies themselves should be looking for ultra-safe investments if they want to keep marketing retirement products to American business, Ball added.
Corporate pension managers also say they are reviewing the way they have communicated the risks and rewards of certain pension choices. Although few will speak for publication, many say they are scrutinizing employee handbooks to make sure they do not mislead workers.
Many workers maintain they have been misled. Either because of naivete or miscommunication, many workers who invest their 401(k) dollars in fixed income plans do so believing these plans bear little, if any, risks. The plans, generally called “guaranteed interest,” or “guaranteed income” accounts, usually are invested in insurance annuities and the interest “guarantee” is only as strong as the insurer that is backing it.
At Xerox, for example, the company offers a 401(k) program where employees can choose how to invest their retirement dollars among several options. One option, which was called the “guaranteed fund” until two months ago, was invested in a number of insurance annuities. About 7.5% of the fund is invested in Executive Life.
Several Xerox employees now charge that they were unaware of the risks. Because of the fund’s name, they assumed it invested in certificates of deposit or Treasury bills.
“We took a low rate of interest because they said this plan was guaranteed,” complained one Xerox employee.
Xerox’s assistant treasurer, Robert R. Evans, maintains that the company did its best to tell employees how their money was invested. Employee handbooks spelled out that the fund was backed by insurance contracts, he said. However, it did not say which insurers were used because new insurance contracts are purchased frequently and such disclosure would require “constantly reprinting” the handbook, he said.
“We weren’t trying to hide anything. When employees asked what insurers backed the interest rate, we told them,” he added.
How many asked? About three or four each year out of the 30,000 to 40,000 that invested in the plan, Evans said. After Executive Life’s seizure, Xerox changed the name of this plan; it’s now called “the income fund.”
