The Employee Benefits Security Administration (EBSA) of the U.S. Department of Labor (DOL) recently issued its report to Congress on Interpretive Bulletin 95-1 (IB 95-1). Section 321 of SECURE 2.0 directs the Secretary of Labor to consult with the ERISA Advisory Council to determine whether any changes to IB 95-1 are necessary, assess any risks to participants, and report their findings to Congress.

Overview of Interpretive Bulletin 95-1

Published on March 6, 1995, IB 95-1 provides guidance to plan fiduciaries when selecting an annuity provider for transactions in which benefits from a defined benefit (DB)¹ pension plan (and its associated liabilities) are transferred to an insurance company (i.e., pension risk transfers). Such transactions shift the risk and responsibility of paying the benefits from the pension plan to the annuity provider. Selecting an annuity provider is a fiduciary act, and fiduciaries have the duty to act “solely in the interest of participants and beneficiaries as well as defraying reasonable expenses of administering the plan.” This means choosing the safest annuity provider, unless special circumstances indicate that doing otherwise would be in the best interest of participants and beneficiaries.

In the years leading up to IB 95-1, some pension risk transfer transactions were conducted with insurance companies with portfolios that contained high-risk investments, leading to concerns about the security of the benefits transferred to them. The DOL filed suit against plan sponsors whose fiduciaries failed in their duty to select the safest annuity provider. Rather than amending existing regulations, the agency decided to issue an interpretive bulletin to provide guidance to fiduciaries when selecting an annuity provider.

IB 95-1 “requires, at a minimum, that plan fiduciaries conduct an objective, thorough and analytical search” to identify and choose annuity providers. This includes reviewing an annuity provider’s ability to pay benefits and its creditworthiness. The analysis should include the following factors:

• “the quality and diversification of the annuity provider’s investment portfolio;”
• “the size of the insurer relative to the proposed contract;”
• “the level of the insurer’s capital and surplus;”
• “the lines of business of the annuity provider and other indications of an insurer’s exposure to liability;”
• “the structure of the annuity contract and guarantees supporting the annuities, such as the use of separate accounts;”
• “the availability of additional protection through state guaranty associations and the extent of their guarantees.”

After plan fiduciaries complete their reviews, it is possible for more than one insurance company to be considered the safest annuity provider.

Fiduciaries may want to enlist outside independent experts to assist in the analysis and search for the safest annuity provider. Such experts may help to minimize conflicts of interest that may arise for fiduciaries to avoid choosing an annuity provider that results in a higher reversion of excess assets for a terminated overfunded pension plan undergoing a pension risk transfer, or to avoid choosing a riskier annuity provider for an underfunded pension plan that impacts the additional contributions needed by the plan sponsor to settle the transaction.

Key IB 95-1 concerns from stakeholders

EBSA met with the ERISA Advisory Council and held over 40 meetings with interested stakeholders to learn how effective IB 95-1 has been, potential areas for improvement, and whether there are any relevant annuity market trends or developments the agency should take into account in its review. There were wide-ranging views of the current guidance, some believing no changes were necessary, with others saying significant changes were needed. There was no consensus on any changes. The following are the concerns raised by stakeholders:

• Ownership structure of insurance companies: Stakeholders raised concerns about life insurance company ownership, particularly private equity-owned insurers, questioning their long-term commitment and prioritization of policyholders' interests. They emphasized the need for transparency and independence in business dealings to avoid conflicts of interest and ensure the financial health of the insurer.
• Rise in nontraditional or risky investments: Stakeholders highlighted the rise in risky investment strategies within the insurance industry, particularly the increased investment in asset-backed securities and private credit, which could expose insurers to significant investment and liquidity risks. They stressed the importance of assessing an insurer’s investment practices and portfolio quality.
• Nontraditional liabilities: Stakeholders expressed concerns about "nontraditional" liabilities, which are not based on mortality or morbidity risks and can significantly impact an insurance company's cash flows and risk profile, potentially leading to a "run" on assets.
• Reinsurance: Stakeholders discussed the rapid growth of reinsurance in the life insurance industry, highlighting concerns about insurers using reinsurance to transfer liabilities to less regulated, often offshore reinsurers, which could obscure or amplify risks. They emphasized the importance of fiduciaries considering the extent and nature of an insurer's reinsurance activities, with some stakeholders advocating for more scrutiny of captive and offshore reinsurers.
• Risk-based capital and other methodologies: Stakeholders mentioned the importance of an insurer's risk-based capital (RBC) ratio in evaluating claims-paying ability and creditworthiness, suggesting it should be considered in fiduciary evaluations, though some cautioned against using it as the sole metric or for comparing companies.
• Separate accounts as a protection: While pension risk transfer transactions use group annuity contracts supported by either the insurer's general account or a separate account, some stakeholders argue that the investment strategy of the account is more important, suggesting that a safe general account might be more protective than a separate account invested in riskier assets, and recommending revisions to guidelines for evaluating separate accounts.
• Administrative capabilities and experience: Stakeholders emphasized that fiduciaries should consider an insurer's administrative capabilities and experience when selecting an annuity provider, focusing on areas such as payment systems, record-keeping, IT capabilities, cybersecurity, call centers, websites, and experience with similar pension risk transfer transactions.
• Spousal protections: Stakeholders raised concerns about Internal Revenue Code (IRC) and ERISA spousal protections in pension risk transfer annuity purchases, such as the potential for annuitants to convert annuities to lump sums without spousal consent and the inadvertent omission of spouses from coverage, but the DOL and the Pension Benefit Guaranty Corporation (PBGC) clarified that plans remain liable for omitted benefits and existing regulations adequately address these protections.
• Protections against creditors and divisions of benefits on divorce: Stakeholders requested clarification on fiduciaries' responsibilities to ensure annuity contracts maintain IRC and ERISA anti-assignment protections, except for Qualified Domestic Relations Orders (QDROs) in cases of divorce. Consultations with the Internal Revenue Service (IRS), U.S. Department of the Treasury, and PBGC confirmed that distributed annuity contracts must be nontransferable and comply with QDRO rules, while certain retirement funds are protected from creditors under the Bankruptcy Code.
• Disclosures: Stakeholders expressed concerns about insufficient disclosure to participants regarding partial buyouts ("lift-outs"), which transfer a portion of a plan's liabilities while the plan continues operating, noting that, while ERISA mandates detailed reporting for total buyouts in standard terminations, it lacks a structure for partial buyouts. Some stakeholders believe post-purchase disclosures comparable to ERISA's annual funding notice are lacking, which could leave policyholders uninformed about the insurer's solvency.
• Loss of PBGC protections: Stakeholders expressed concerns that the PBGC's removal represents a significant loss of security, as state guaranty associations (SGAs) are not pre-funded and may not offer the same level of guarantee.
• Relevance of state guaranty associations (SGAs): Several stakeholders questioned the relevance of SGA guarantees in the Interpretive Bulletin's criteria for selecting the safest annuity provider, arguing that SGA coverage does not determine insurer safety, and that its inclusion might lead fiduciaries to perform less rigorous solvency analyses, relying instead on the backstop of SGA coverage.
• Impact of partial plan risk transfer annuity purchases on residual funding status of plans: Stakeholders raised concerns that partial buyouts might negatively impact the funding of remaining plan liabilities, potentially leaving some participants worse off. They also noted that fiduciaries may prioritize cost over safety in annuity selections, leading to uncertainty about how the Interpretive Bulletin's factors apply when a partial buyout significantly reduces a plan’s funding percentage, and questioned whether fiduciaries might sometimes be unable to implement de-risking decisions due to these negative effects.

EBSA recommends more analysis of IB 95-1

Based on all the feedback gathered and the agency’s review of the Interpretive Bulletin, EBSA determined that the Bulletin's principle-based guidance on evaluating an annuity provider's claims-paying ability and creditworthiness remains relevant, but further exploration is needed to determine whether updates are necessary due to industry developments. They acknowledged the complexity of the concerns raised and the lack of consensus among stakeholders and intend to seek broader public input before making any changes.

IB 95-1 and recent litigation

While IB 95-1 remains an important guide for fiduciaries, the evolving landscape of the life insurance and pension risk transfer industries necessitates ongoing vigilance. Several companies have been sued over their choice of annuity provider in their pension risk transfer transactions. In addition, the U.S. Supreme Court recently overturned the Chevron deference, which allowed courts to defer to reasonable agency interpretations when the statute was silent or ambiguous. As a result, courts can no longer defer to agency interpretations. Instead, they must independently interpret statutes, and may consider agency interpretations to help inform their decisions. This shift places a greater onus on plan sponsors to ensure that their decisions are firmly grounded in statutory requirements and well-documented fiduciary processes.

Please contact your Milliman consultant with any questions.

¹ IB 95-1 was first amended by the Interim Final Rule to limit the application to defined benefit plans, which was finalized in the Final Rule issued on October 7, 2008. A separate regulation provides a safe harbor for the selection of annuity providers for individual account plans.