COMPARING GROUP ANNUITY CONTRACTS AND DEFINED BENEFIT PENSION PLANS

COMPARING GROUP ANNUITY CONTRACTS AND DEFINED BENEFIT PENSION PLANS 2 Group annuity contracts play a vital role in protecting pension benefits. T...
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COMPARING

GROUP ANNUITY CONTRACTS AND DEFINED BENEFIT PENSION PLANS

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Group annuity contracts play a vital role in protecting pension benefits. The following is a comparison of the benefits and features of group annuity contracts to those of traditional defined benefit (DB) pension plans.

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DEFINED BENEFIT PENSION PLAN

GROUP ANNUITY CONTRACTS

An employer-sponsored retirement plan whereunder the employer commits to paying employees a specific benefit for life beginning at retirement. The benefit amount is established in advance and is typically based on age, earnings and years of service. The plan sponsor is required to make contributions to the plan for the purpose of funding retirement benefits and in accordance with statutory funding obligations.

A contract sold by an insurance company, providing a guaranteed stream of income for members of a specified group at stated intervals, at least annually. Payments are typically made for each recipient’s lifetime, and, if applicable, the lifetime of a joint annuitant thereafter. In some instances, payments are made for a specified period. Group annuity contracts make it possible to provide more workers with guaranteed retirement income less expensively than if each worker had to be individually insured.

A Brief History

1850

1875

1921

First U.S. pension plan established1

Group annuity contracts are among the first arrangements pension plan sponsors use to fund retirement plans2

1900

1950

2000

1985 90% of Fortune 100 companies offered traditional DB pension plans3

Past decade, participants in single-employer DB pension plans 4 declined by approximately 2.7 million

History of Pension Plans, Employee Benefit Research Institute, March 1998. The History of Annuities in the United States, The Community of Annuity Insurers, September 1997. 3 Retirement Plans Offered by 2013 Fortune 100, Towers Watson & Co., Nov. 14, 2013. 4 Strategic Plan FY 2014–2018, Pension Benefit Guaranty Corporation, March 4, 2014. 1 2

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2013 The number 3 stands at 30%

DEFINED BENEFIT PENSION PLAN DEFINED BENEFIT PENSION PLAN

GROUP ANNUITY CONTRACTS GROUP ANNUITY CONTRACTS

How They Provide Retirement Income How They Provide Retirement Income How They Provide Retirement Income • Retirement income is provided by the assets in the

• Retirement pension fundincome is provided by the assets in the pension fund • Actuaries regularly review plan contributions when • Actuaries regularly when assessing the plan’sreview assetsplan and contributions liabilities to ensure assessing the plan’s ensure that the pension fundassets will beand ableliabilities to meet to future that the pension fund will be able to meet future payment obligations payment obligations • The funded status of the 100 largest corporate • The funded of the 100between largest corporate pension plansstatus has fluctuated 77.5% pension plans has fluctuated between 2015 77.5% and 82.7% from January to December and 82.7% from January to December (Source: Milliman 100 Pension Funding 2015 Index, (Source: Milliman 100 Pension Funding Index, December 31, 2015) December 31, 2015)

• Benefits provided under group annuity contracts

• Benefits provided groupamount annuity and contracts are guaranteed forunder the entire are legally are guaranteed for the entire amount andand are legally binding obligations between the insurer the binding obligations between the insurer and the retiree retiree

unding requirements requirements are • •  FFunding are carefully carefullycalculated calculatedand andare subject to state regulation and monitoring are subject to state regulation and monitoring

nder Department Department of Labor • •  UUnder Labor standards standards(DOL (DOLIBIB

95-1), plan plan fiduciaries fiduciaries must 95-1), must conduct conductan anobjective, objective, thorough and and analytical analytical search thorough searchfor foran anannuity annuityprovider, evaluatingevaluating a numberaofnumber factors of relating to relating the claims provider, factors to paying ability and creditworthiness the claims paying ability and creditworthiness

roup annuity annuity contracts • •  GGroup contracts are are100% 100%funded fundedatatinception inception

Approaches to Risk Management Approaches to Risk Management Approaches to Risk Management pensionplans plansinvest investover over60% 60%in inrisky risky • • Typical Typical pension

investmentslike likecommon commonstocks, stocks,private privateequity equity investments and hedge funds (Source: BNY Mellon Institutional and hedge funds (Source: BNY Mellon Institutional Scorecard,July July31, 31,2015) 2015) Scorecard,

plansponsor sponsordoes doesnot nothold holdadditional additional • • Typical Typical plan reserves to cushion possible losses thepension pensionplan plan reserves to cushion possible losses the may experience may experience preciseamount amountof ofcapital capitalisisrequired requiredto toaccount account • • No No precise forpossible possiblelosses losses for

areexposed exposedto tomarket marketvolatility—fluctuating volatility—fluctuating • • Assets Assets are significantlyboth bothup upand anddown down significantly

areinvested investedprimarily primarilyin inhigh-grade, high-grade, • • Assets Assets are fixed-incomesecurities securities fixed-income

arelegally legallyrequired requiredto tohold holdample amplebenefit benefit • • Insurers Insurers are reserves,ensuring ensuringfulfillment fulfillmentof ofall allobligations obligations reserves,

holdprecise preciseamounts amountsof ofcapital capitalto toaccount account • • Insurers Insurers hold forpossible possiblelosses losses for

aretested testedeach eachyear yearto toensure ensuresufficient sufficient • • Assets Assets are amountsexist existto tofulfill fulfillthe thepromised promisedbenefits benefits amounts

regulatorysupervision supervisioncontinues continuesthroughout throughout • • State State regulatory thelife lifeof ofthe thepromises promisesmade made the

riskisisassumed assumedby bythe theplan plansponsor, sponsor, • • Investment Investment risk indirectly indirectly

Layers of Protection

Layers of Protection

layersof ofprotection protectionsupport supportthe thebenefit benefit • • Three Three layers promisesof ofdefined definedbenefit benefitplans: plans: promises

Currentassets assetsand andinvestment investmentresults results • Current Contributionsthat thatemployers employersare arerequired requiredto to • Contributions maketo tokeep keepplans plansfunded funded make

Guaranteesprovided providedby bythe thePension PensionBenefit Benefit • Guarantees GuarantyCorporation Corporation(PBGC) (PBGC)in incase casethese these Guaranty plans are not able to meet obligations plans are not able to meet obligations

Layers of Protection

generalaccounts accountshold holdcertain certainassets assetsto to • • Insurers’ Insurers’ general supporttheir theirpayment paymentobligations obligationsunder undergroup group support annuity contracts annuity contracts

assetsare areinvested investedprimarily primarilyin inhigh-grade, high-grade, • • These These assets fixed-incomebonds, bonds,with withcash cashflows flowsthat thatare are fixed-income intendedto tomatch matchthe theinsurers’ insurers’liabilities liabilities intended

maintainaadiversified diversifiedbusiness businessmix mixwith with • • Insurers Insurers maintain

offsettingrisks; risks;for forexample, example,the themortality mortalityrisk riskof of offsetting life insurance helps balance the longevity risk of life insurance helps balance the longevity risk of groupannuities annuities group 3

DEFINED BENEFIT PENSION PLAN

GROUP ANNUITY CONTRACTS

Supervisory Safeguards Supervisory Safeguards Supervisory Safeguards Pension Benefit Guaranty Corporation (PBGC)

State Guaranty Associations (SGAs)

PBGC’s goal is to encourage the continuation of pension benefit payments for workers affected by failed pension plans

• Each • Each state (including Puerto Rico and the District of Columbia) has an SGA operating under individual state laws

• Only • Only guarantees payments up to specified limits and is not supported by separate reserve fund

• In • In the unlikely event of an insurance company failure, state insurance regulators provide annuitant protection through their SGA

• For • For those annuitants whose benefits are paid by the PBGC, 16% had their benefits reduced (percentage is higher for multiemployer plans)5

• Regulators • Regulators place policyholders and annuitants first in priority for claims on a failed insurance carrier’s assets

• Those benefits were reduced by an average

of 28%5

• PBGC • PBGC is permitted to operate with a long-term deficit ($61.7 billion as of fiscal year 2014)6

Between 1991–2009, average recovery by annuitants from liquidated insurance companies exceeds 1970

1980

1990

2000

94%

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2010

Since ERISA was enacted in 1974, the PBGC has taken on over 1.5 million 6 people from 4,700 failed DB plans, making annual payments of $5.6 billion 140%

100%

70%

2000

2005

2010

Twice since 2000, the 100 largest U.S. corporate pension plans lost more than 30% of plan funded status to market declines.8

Source: PBGC’s Guarantee Limits—an Update. A PBGC study describing the effects of the statutory and regulatory limitations on PBGC guarantees. 6 Pension Benefit Guaranty Corporation 2014 Annual Report, November 17, 2014. 7 Insurance Oversight and Legislative Proposals, National Organization of Life and Health Insurance Guaranty Associations, November 2011. 8 Source: Milliman Pension Funding Index, as of December 31, 2015. 5

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FUNDED STATUS The comparison of a plan’s assets to its liabilities; the amount by which a pension plan’s assets exceed its projected future benefit payments.

EMPLOYEE RETIREMENT INCOME SECURITY ACT A Federal law that sets standards of protection for individuals in most private-sector retirement plans.

PENSION BENEFIT GUARANTY CORPORATION An independent agency of the U.S. government and created by ERISA. The PBGC is subject to limitations, paying pension benefits up to the maximum guaranteed benefit set by law to participants who retire at age 65 ($60,136 a year in 2015).9

STATE GUARANTY ASSOCIATIONS State guaranty associations act as a form of insurance for customers of insurance companies. State guaranty associations supplement the state regulatory process and provide additional benefits coverage. Current coverage information can be found at nolhga.com.

Pension Benefit Guaranty Corporation, “Maximum Monthly Guarantee Tables,” April 2015.

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280 Trumbull Street Hartford, CT 06103 prudential.com

Prudential Financial and The Prudential Insurance Company of America are each solely responsible for their own contractual obligations and financial condition. Products not available in all states. Group annuity contracts are issued by The Prudential Insurance Company of America (PICA), Newark, NJ, a Prudential Financial company. The Milliman 100 Pension Funding Index projects the funded status for pension plans included in the annual Milliman study of the 100 largest defined benefit plans sponsored by U.S. public companies, reflecting the impact of market returns and interest rate changes on pension funded status, utilizing the actual reported asset values, liabilities and asset allocations of the companies’ pension plans. © 2016 Prudential Financial, Inc. and its related entities. Prudential, the Prudential logo, the Rock symbol, and Bring Your Challenges are service marks of Prudential Financial, Inc. and its related entities, registered in many jurisdictions worldwide. 0264482-00010-00 PRTBR013 07/2016

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