PAC Case Study: Tracking Down Benefit When Employer Transforms Pension into Annuity

There was a reason why Marco couldn’t find the pension he had earned many years ago. It didn’t exist any longer.

Many clients call the Pension Action Center because they can’t figure out who is responsible for paying them benefits earned long ago. Employers merge, go out of business or just disappear as entities in their own right. It’s a challenge to find out who is responsible for paying the benefit now.

But an increasing number of retirees need help because the pensions they’re looking for aren’t actually pensions any longer. Marco, who asked that his real name not be used for this story, was one of them.

At some point, his pension had been transformed from an employer’s retirement obligation into an annuity administered by an insurance company. But he had known nothing about it.

Employers who no longer want to maintain their pension plans can pay insurance companies to take over the obligations, a multi-billion dollar financial strategy known as “pension risk transfer.”

The use of this strategy has been growing dramatically. Pension risk transfer transactions grew from $3.8 billion in 2013 to $26.4 billion in 2018, according to the publication PlanSponsor.

Companies that transfer their pension obligations to insurance companies are supposed to notify beneficiaries but many individual cases fall through the cracks.

“This is a serious and growing problem for people who worked for many years to earn retirement benefits,” said Anna-Marie Tabor, director of the pension center at UMass Boston’s McCormack Graduate School. “Tracking down insurance companies and the annuities that replaced pensions is a daunting task for any retiree.”

Marco’s story began long ago, when he and his wife immigrated to the United States from Sicily in 1969. He was 22 at the time and within weeks had landed a job at the Connecticut factory of the Whitney Chain Company, which held the patent on a type of roller chain in high demand for heavy industrial applications.

He started on the assembly line – heavy, dirty, noisy work. Over years, Marco moved off the line and developed an expertise in tool and die making. In addition to his shift at the factory, he worked evenings making pizza, cleaning offices and even found time to earn a real estate license.

Whitney Chain and its industry began to change about a decade after Marco arrived. The company was acquired by Litton Industries and later by Dresser Industries. The business was struggling against fierce competition from Japan. One day, a test of less-costly Japanese chain was shown to be stronger than the product he had spent more than 10 years making. “I saw the writing on the wall,” he says. “This company was in trouble.”

Marco left Whitney Chain in 1981 and by that time had earned a vested pension benefit, entitling him to monthly payments of $159 once he reached retirement age. He was 33 years old and retirement seemed a long way off, but he recalls declining an offer at the time to cash out with a $1,500 lump-sum payment. Marco kept the benefit and changed careers, becoming a full-time real estate agent.

In 2017, Marco decided it was time to claim his pension but was shocked to learn it was nowhere to be found. He sought out help from local and international unions. He went to Litton and Dresser. Nothing.

“I spent a lot of time going back and forth,” says Marco. “I got nowhere.”

Then he discovered the Pension Action Center through his Internet research and made a call. PAC took on his case and identified records at the federal Pension Benefit Guaranty Corporation (PGBC), a government agency that insures pensions, indicating the company last responsible for Marco’s pension paid an insurance company to convert the benefit into an annuity.

The government records also provided the names of two insurance companies where the pension fund had purchased annuities, without stating the specific company where Marco’s annuity was located.

PAC called the insurance companies and was told by customer service agents that they had no record of Marco. However, after submitting follow-up written inquiries to the two companies, one responded that it did, in fact, have Marco’s annuity after all.

Marco is now receiving an annuity with an estimated value of more than $60,000 on a cash accumulated basis.

PAC receives many calls from plan participants who fall through the cracks. Pension plans do not always follow the federal notice requirements, leaving retirees like Marco with no clue where to claim their benefits. In other cases, retiree names are erroneously omitted from the list of annuities to be purchased, and their benefits are simply lost.

Worse yet, people like Marco have few options for help. For most purposes, insurance companies are regulated by states, not by the federal government.

Once the transition from pension to annuity is complete, federal laws that provide some protection for individual participants no longer apply. Federal regulators essentially lose their jurisdiction.

Beneficiaries could complain to a state regulator, but that path is unlikely to be helpful if retirees cannot name an insurance company that issued an annuity. Others, like Marco, who don’t even know their pensions have been replaced with annuities, face still longer odds.

“This is a problem that will only grow as more deferred vested participants reach retirement age, and as companies continue to off-load their pension risk by purchasing annuities,” says Tabor.

“Stronger notice requirements, penalties, and enforcement would help,” she says. “In the meantime, PAC stands ready to help the retirees like Marco, whose years of labor forms the basis of the PRT market.”

 

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