Private Pensions

Protections for Retirees' Insurance Annuities Can Be Strengthened Gao ID: HRD-93-29 March 31, 1993

Insurance regulators seized control of several large life insurance companies in 1991 because of solvency problems. These events have raised concerns about the adequacy of protection for the 3 million to 4 million retirees and beneficiaries receiving annuities. In the wake of the seizure of the Executive Life Insurance Company, for example, 44,000 retirees received only 70 percent of their monthly annuities for more than a year. This report assesses (1) state guarantee coverage of insurance annuities received by retirees from private pension plans and (2) federal regulation and oversight of the selection of private pension plans of insurers to provide annuity benefits. GAO also discusses options to improve protection for retirees' insurance annuities.

GAO found that: (1) some retirees risk losing part of their benefits if their insurers fail because of variations in state guarantee coverage provisions, including gaps in annuity coverage, annuity values exceeding the state guarantee limits, and variations in state guarantee limits; (2) the federal guarantee, under the Employee Retirement Income Security Act (ERISA), does not extend to insurance annuities; (3) only one state indexes its guarantee coverage limits to reflect inflation; (4) state guarantee coverage could be improved by standardizing coverage through an interstate compact or incorporating uniform coverage provisions in financial regulation standards; (5) the federal government could improve guarantee coverage by extending Pension Benefit Guaranty Corporation (PBGC) coverage to insurance annuities purchased by PBGC-covered plans or establishing a national insurance guaranty fund; (6) the Department of Labor does not routinely monitor annuity-provider selection and has not provided formal guidance for fiduciaries to consider in evaluating annuity providers; (7) options to strengthen federal regulation and oversight include requiring that fiduciaries meet specified minimum standards in selecting an annuity provider; (8) PBGC participant notification requirements requiring advance notification about an annuity provider or changes in guarantee coverage are inadequate; and (9) Labor investigates questionable annuity purchases because of the potential conflict between participant and sponsor interests and the difficulty in remedying fiduciary breaches after termination.

Recommendations

Our recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.

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