Senator Orrin Hatch (R-Utah) last week spoke before the U.S. Senate to introduce the Secure Annuities for Employment (SAFE) Retirement Act of 2013. The proposed legislation 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. That report assessed the funding of state and local government pension plans, and argued that DB pension plan debt placed too great a burden on the future solvency of government plan sponsors.
The SAFE Retirement Act would overhaul the method in which risk is borne in a participating governmental DB plan. For each year of pension benefit service accrued by an employee in a new SAFE plan, the plan would purchase a deferred annuity contract from a private insurer that would cover the employee’s benefit earned in that year’s accrual. Such contracts would be purchased annually, thereby completely funding in each year the annually accumulated benefit, while transferring the risk from both the employee and the government. 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 such risk would be more appropriately allocated to private insurance companies, due to the strict regulations for reserving and solvency standards that exist for these entities. During his speech before the Senate, he noted that “[T]he life insurance industry is the only industry in the world designed from the ground up to manage longevity risk.” He went on to point out that, “The life insurance industry is reliably solvent because state insurance regulations are strict, 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. As Hank Kim, the executive director of the National Conference on Public Employees Retirement Systems, points out, “[T]here are a slew of private insurance companies that have gone bankrupt.” In the event of such a bankruptcy, the payment of pension benefits to government employees could be fundamentally jeopardized.
Another potential issue a SAFE retirement plan might face is an increase in cost to provide DB pensions under the structure. As William “Flick” Fornia, actuarial consultant to public pension plans and president of Pension Trustee Advisors, observes, “[T]he capital requirements for insurance companies are much more stringent than the requirements that the states put on themselves for their pension funds. Public pension fund earnings tend to be higher than insurance companies’ would be because of their investment flexibility, and therefore the costs would go up quite a bit to try to have public employees insured.”
The bill was referred to committee for consideration on July 9, 2013. To read the full text of Senator Hatch’s proposal, click here.