DOL’s Pension Risk Transfer Flawed Report

/ ChrisTobe

Summary

The Department of Labor’s June 2024 49-page “Report to Congress on Interpretive Bulletin 95-1” concludes that IB 95-1’s factors remain “relevant,” endorses a principles-based approach, and declines to materially strengthen fiduciary obligations for selecting PRT annuity providers. In doing so, the report ignores core ERISA prohibited-transaction risks and understates the post-transfer risk shift to retirees—risks that are amplified by offshore reinsurance, thin capital, and state-level guaranty limits that are far weaker than PBGC protection. DOL+1

What the DOL says—and why that’s not enough

The DOL affirms that IB 95-1’s existing factors (claims-paying ability, creditworthiness, etc.) still guide fiduciaries and that the guidance “should remain principles-based.” It even notes that the factors are “not exhaustive” and provide no safe harbor if a provider later defaults. Yet the report does not grapple with how today’s PRT ecosystem actually works—and how it creates party-in-interest conflicts and structural opacity incompatible with ERISA. DOL

Two omissions are fatal:

  1. PBGC is gone after PRT. The DOL never squarely centers the reality that once benefits are off-loaded to an insurance company, participants lose PBGC insurance. That’s not theoretical; it’s PBGC’s own statement of fact. Any prudence analysis that treats an annuity the same as a PBGC-backed pension is misleading by omission. Pension Benefit Guaranty Corporation+1
  2. State guaranty caps are a fraction of typical liabilities. Most states cap individual annuity protection around $250,000 present value (details vary). For many retirees, that is well below the exposure transferred. Treating state guaranty funds as a PBGC substitute is wrong as a matter of law and math. NAIC+2Federal Reserve Bank of Chicago+2

The risk the DOL doesn’t model: Offshore reinsurance + private-credit asset mixes

Since IB 95-1 (1995), life insurers have pivoted to asset-intensive models funded by PRT cash flows and supported by offshore reinsurers (often Bermuda). U.S. insurers shifted ~$800 billion of reserves offshore from 2019–2024 (and more than $1 trillion of offshore reinsurance liabilities by end-2024), to jurisdictions with different capital regimes and looser transparency, while allocating heavily to private credit—illiquid, mark-to-model assets whose behavior in stress is uncertain. None of that complexity is reflected in the DOL’s minimal update. Reuters+2Financial Times+2

Even foreign prudential regulators have flagged funded reinsurance risks and connected-party exposures—warning they may restrict deals if controls aren’t improved. The DOL report makes no comparable, concrete risk tests for ERISA fiduciaries selecting annuity providers engaged in those practices. Financial Times+1

Prohibited-transaction blind spot

ERISA §406 prohibits transactions that transfer plan assets to, or benefit, a party in interest—and bars self-dealing. A PRT executed with an insurer that (a) relies on affiliated/offshore reinsurers and (b) captures large undisclosed spreads from private-credit allocations raises classic §406 questions:

  • Conflicted economics: Affiliates capture spread profits while participants bear solvency and liquidity risk—especially post-PRT when PBGC is gone.
  • Opacity: Offshore cessions and private-credit marks reduce visibility into the actual asset-liability profile backing “guarantees.”
  • Process failure: Absent enforceable downgrade/exit rights or spread transparency, fiduciaries cannot monitor or remove an imprudent provider, which also frustrates their duties under Tibble/Hughes-style “continuing duty to monitor.”

The DOL report barely acknowledges these §406 avenues, treating PRT as a one-time prudence screen, rather than an ongoing conflict-management problem that can’t be solved by generic “factors.” DOL

“No injury” litigation head fakes don’t negate the risk

Industry commentary trumpets recent standing dismissals (no immediate injury) in PRT cases, as if that validates the structures. It doesn’t. Standing rulings say nothing about whether the PRT increased risk or violated ERISA; they only say plaintiffs sued too early. Meanwhile, at least one high-profile PRT case has survived a motion to dismiss—recognizing that allegations about substantial default risk and reduced protections are plausible. ASPPA+1

What a minimally competent DOL framework should require

If the DOL were serious about aligning IB 95-1 with today’s market, it would explicitly require fiduciaries to:

  1. Model post-PRT risk vs PBGC: Quantify the relative default/severity risk gap between (a) PBGC-backed plan and (b) the selected annuity, including state guaranty caps and reinsurer counterparty risk. Pension Benefit Guaranty Corporation+1
  2. Unmask offshore reinsurance chains: Identify ceding percentages, reinsurer domicile, capital/solvency ratios, and any connected-party investments; require stress scenarios reflecting private-credit illiquidity. Financial Times+1
  3. Contract for downgrade/exit rights: Hardwired downgrade clauses, transfer/commutation rights, and spread transparency so fiduciaries can satisfy the continuing duty to monitor—without trapping retirees.
  4. Address §406 directly: Treat affiliated reinsurance and undisclosed spread capture as presumptively conflicted, demanding either a clear prohibited-transaction exemption showing compliance with Impartial Conduct Standards (best interest, reasonable comp, no misstatements) or a redesign of the transaction.
  5. Participant-level disclosure: Plain-English notice that PBGC protection ceases after PRT, and a side-by-side comparison of guarantees and limits under state guaranty funds. Pension Benefit Guaranty Corporation+1

Bottom line

By blessing a status-quo, principles-only reading of IB 95-1, the DOL has underwritten opacity at the precise moment PRT risks are surging from offshore reinsurance and private-credit exposures. Once the PBGC net is cut, participants shoulder a risk profile 10–20× higher than a PBGC-insured plan—while insurers and sponsors monetize the spread. A modern IB 95-1 must start with that reality, or it will remain a roadmap for transferring risk away from retirees’ protections and toward insurer profits. DOL+2Pension Benefit Guaranty Corporation+2

Sources

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