In an effort to reduce growing pension liabilities in the United States, a top Republican senator has proposed a plan that would allow state and municipal governments to transfer pension management to insurance companies.
Authored by Orrin Hatch of Utah, the senior Republican on the Senate Finance Committee, the bill would have life insurers pay benefits to plan members through annuity contracts. The change would be voluntary.
Under the Hatch proposal, called the Secure Annuities for Employee (SAFE) Retirement Act of 2013, public employees would still be able to receive the benefits they want, but taxpayers would no longer be on the hook if pension portfolios are adversely affected by market conditions. That risk would be shifted to insurers.
“The life insurance industry invests the assets, pays the retirement benefits and bears the risks,” says a summary of the bill. The federal government would only be involved in certifying the tax-qualified status of the plan.
Hatch argues that his proposal, which does not include “an explicit or implicit federal government guarantee,” would make costs more predictable, protecting both plan members and sponsors.
“America cannot continue sleepwalking into the financial disaster that awaits us if we do not get the public pension debt crisis under control,” said Hatch during a Senate speech earlier this week. “The problem is getting more serious every day and cannot be remedied merely by fine-tuning the existing pension structures available to public employers.”
The size of public pension debt in the U.S. is currently US$4.4 trillion (C$4.6 trillion), according to Hatch. In addition, the country has outstanding state and local municipal bond debt amounting to $3.7 trillion.
At the same time, the U.S. savings rate is only 2.5%, life expectancy is getting longer, and DB pension plans are more and more scarce. All of this means that Americans are not adequately equipped for retirement, so the country needs a new pension system, Hatch says.
Under his bill, if a local government chooses to transfer its pension plans to the insurance industry, it would have to hold competitive bidding every year. The chosen company would provide each worker with a monthly income at retirement for life. These annuity contracts would be portable, allowing employees to keep them even if they change jobs.
The Hatch proposal also includes recommendations for private pension reform. The bill calls for the creation of a retirement savings plan, the Starter 401(k), geared especially toward small- and mid-size employers that are not able to contribute to a pension plan but still want to help their employees save.
The Starter 401(k) would allow workers to save up to $8,000 per year, more than they can through a U.S. individual retirement account; at the same time, it would not involve the administrative expense or burden of a traditional DC plan, according to Hatch.
Additionally, the proposal envisions transferring jurisdiction over rules that prohibit some transactions involving individual retirement accounts from the U.S. Labor Department to the Treasury Department. The Treasury, together with the Securities and Exchange Commission, would prescribe professional standards of care, which brokers and investment advisors owe to plan members.
The senator says his bill already has the support of the biggest life insurance company in the U.S., MetLife Inc., as well as entities such as the U.S. Chamber of Commerce and the Small Business Council of America.
But the plan has its critics, too. Some unions argue that moving to annuity companies would hardly solve the U.S. pension crisis. They say the underfunding currently plaguing pension plans is not the result of exposure to risk, but rather, of employers failing to make the necessary contributions.
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