Current federal guidelines on the oversight of the growing pension risk transfer market satisfy today’s principles-based regulatory regime, but regulators need to delve deeper into private equity’s multi-year rush into life insurance and the impact of “claims-paying ability and creditworthiness,” according to a report by the US Department of Labor (DoL).
“Further exploration into developments in both the life insurance industry and in pension risk transfer practices is necessary to determine whether some of the [current regulations] need revision or supplementation and whether additional guidance should be developed,” the DoL says.
The report, released yesterday, will allay the immediate fears of private equity sponsors and their recently acquired life insurance operations that were worried the federal government was about to muscle through new rules via fiduciary standards set by the Employee Retirement Income Security Act (ERISA).
But the report by the DoL’s Employee Benefits Security Administration said that it would not recommend any new guidance on pensions risk transfer arrangements despite issues raised by several stakeholders and “few, if any, areas of consensus.”
“Some stakeholders attributed concerning developments in these areas to private equity firms’ increased involvement in the industry,” the report stated. “They said that private equity-affiliated insurers tend to engage in riskier practices than traditional insurers. Stakeholders were also concerned that private equity firms do not have a long track record of managing life insurance obligations and may lack a commitment to policyholder interests.”
But there were just as strong argument from industry that the current standards were more than adequate.
Growing PE Presence In Life Insurance and Offshore Reinsurance
As the DoL points out, the private equity industry has moved into the life insurance industry for a stable source of investable assets and leveraged pension transfer arrangements to boot growth. Pensions risk transfers absorb existing pension funds by annuitizing them into a life insurance structures.
The report says that about eight percent single-employer pension plans conducted some form of partial pension risk transfer during a 2015-2022 and that 32 percent of those purchased annuities for an estimated 2.2 million participants.
Defined benefit pension risk transfer annuity purchases reached an all-time high with transactions totaling $52 billion in premiums in 2022.
That same year U.S. Senator Sherrod Brown (D-Ohio) requested that state and federal regulators study private equity growing role in life insurance and pension risk transfers.
