Connecticut’s Democratic Governor Dan Malloy has signed into law new protections for retiree participants of pension plans that have been de-risked by their employers.
The law will restore retirees’ protections from creditors that were lost subsequent to de-risking.
ERISA-qualified retirement accounts generally protect participants’ retirement assets from creditors.
But as more sponsors have taken to the de-risking option in the face of higher Pension Benefit Guaranty Corp. premiums, a low-interest rate environment that inflates the discount rate on future pension obligations, and increased mortality rates, the question of whether or not annuitants’ benefits are protected from creditors has arisen.
Creditors could garnish annuity payments even though those assets were formerly protected under ERISA, according to a press release from protectseniors.org, a non-profit advocacy for private sector and government retiree protections.
“This is an important and historic win for Connecticut retirees,” said Edward Stone, counsel for protectseniors.org. “This law restores creditor protection for Connecticut retirees and hopefully paves the way for other states to follow suit.”
In New York, a similar bill failed to make it out of the most recent legislative session.
Action at the state level comes as the Department of Treasury issued new regulations prohibiting plan sponsors from offering existing retirees lump-sum pension buyouts.
C. William Jones, chairman of protectseniors.org, said that while the law in Connecticut isn’t perfect, it is a significant victory.
“De-risking is going to be a major issue going forward. We plan on working with legislation on a state-by-state level. I think Connecticut will break the ice for us,” said Jones.
Pension rights advocates say de-risking schemes subject retirees’ life earnings to too much risk, because the protections offered by the Pension Benefit Guaranty Corp. are lost after the pension liabilities are moved from sponsors to insurance companies.
Each state’s insurance regulatory body provides varying levels of guarantees for annuity products. Jones said the highest guarantee is $500,000. But that would only protect 10 years of a $50,000 pension, notes Jones.
“We’d like to see all state insurance regulators guarantee at least $500,000. But even if they did, there is still the risk of losing more than what the PBGC protect if an insurance company goes under,” he added.
In the meantime, Jones says he and his organization will “take what we can get.”
“What happened in Connecticut is a big deal. Here is a state that recognized a problem and took action,” he added.
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Nick Thornton
Nick Thornton is a financial writer covering retirement and health care issues for BenefitsPRO and ALM Media. He greatly enjoys learning from the vast minds in the legal, academic, advisory and money management communities when covering the retirement space. He's also written on international marketing trends, financial institution risk management, defense and energy issues, the restaurant industry in New York City, surfing, cigars, rum, travel, and fishing. When not writing, he's pushing into some land or water.
