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Consumer Protection: PBGC versus Insurance Industry – Whose Guarantees are Stronger?

As corporate pensions examine risk transfer strategies as part of their de-risking approach, plan sponsors are also considering the strength of the consumer protections offered to participants as the benefit obligation migrates from the corporate/ERISA/PBGC framework to an insurance company/state insurance regulatory framework. One of the key questions being asked is “What effect does this transfer have on participant benefit security?” According to a recently released study by the National Organization of Life and Health Insurance Guaranty Associations (NOLHGA), both systems were judged to offer strong benefit protection for the vast majority of benefit claims, with only a small minority of claims having marginally different outcomes under one system or the other. Notably, the study examined the strength of the system through two possible outcomes: regulatory strength to prevent failure in the first place and, in case of failure, the post-failure protections that would be offered. Within the corporate system, it was noted that while regulations enforce fiduciary and funding responsibilities over plan assets, regulators have no effective control over the overall financial condition of the sponsoring employer. However, within the insurance system, rigorous statutory requirements mandate that annuitized liabilities be fully funded by insurance companies. In cases of failure, while the PBGC provides a guarantee up to a certain amount in cases of failure, the currently underfunded agency is primarily supported by the premiums that it charges and does not have any federal guarantees. Within the insurance framework, the state’s Guarantee Associations (GA) are required to protect annuity recipients in case of failure, with additional safeguards available. Despite different approaches to safeguarding benefit security, both the federal pension protection system as well as the state insurance system provide strong protection for the vast majority of the consumers.