The Plan Sponsor is the primary guarantor of pension benefits...
Plan sponsors are the primary guarantors of their pension plans. They are responsible for making sure there are sufficient assets in the plan to pay all benefits owed to participants, and the participants’ beneficiaries, for as long as they live.
However, plan sponsors can terminate their pension plans if desired, but first they must make good on all their pension obligations. This can be done in two ways: Provide a lump sum option to those that are owed a benefit, or buy an annuity for pensioners that exactly matches the benefits owed them. Only in the event of a bankruptcy are plan sponsors able to get out of their obligations via a takeover of the plan by the PBGC as discussed below.
Plan sponsors are the primary guarantors of their pension plans. They are responsible for making sure there are sufficient assets in the plan to pay all benefits owed to participants, and the participants’ beneficiaries, for as long as they live.
However, plan sponsors can terminate their pension plans if desired, but first they must make good on all their pension obligations. This can be done in two ways: Provide a lump sum option to those that are owed a benefit, or buy an annuity for pensioners that exactly matches the benefits owed them. Only in the event of a bankruptcy are plan sponsors able to get out of their obligations via a takeover of the plan by the PBGC as discussed below.
As an aside, a company's decision to terminate its plan should not be taken as an indication that the company is in financial trouble. Usually plan sponsors make these kinds of moves because the plan is no longer needed to attract and retain employees, so the expenses and risks no longer make economic sense.
For those that are given an election option by their plan the choice is between keeping your pension, albeit in the form of an annuity from an insurance company, or taking a lump sum. Either way, the PBGC will be out of the equation and the guarantees switch to the Annuity Guarantees discussed below.
PBGC (Pension Benefit Guarantee Corporation) Guarantees
The PBGC is a federal government agency that guarantees pension plan benefits.
However, it is not formally backed by the full faith and credit of the federal government, though, as a government agency, many feel the federal government would step in to secure pensioners benefits if need be. But it is not guaranteed that the government would, in fact, back the PBGC in such circumstances.
After plan assets have been distributed to provide all of the plan's benefits, either through the purchase of an annuity contract or in another form permitted by the Plan, the PBGC’s guarantee of participant benefits ends.
The pension plan may pay pension benefits in the form of an annuity purchased from a licensed insurance company. Once the plan purchases an annuity for participants, the insurance company will be responsible for paying their benefit.
For more check out the FAQ page on the PBGC website: http://www.pbgc.gov/about/faq/pg/general-faqs-about-pbgc.html
Annuity Guarantees
The Insurance industry is heavily regulated. Few major carriers ever get into trouble as the National Association of Insurance Commissioners (NAIC) is charged with seeing and correcting potential issues in advance.
The Insurance Industry, including annuities, is a state regulated industry under the auspices of the State Regulators and the National Association of Insurance Commissioners.
What happens when an insurance company fails? http://www.nolhga.com/policyholderinfo/main.cfm/location/insolvencyprocess
All states, Puerto Rico and the District of Columbia have “guaranty associations.” The purpose of a guaranty association is to protect policyholders up to specified limits in the event the insurance company is financially unable to meet its obligations.
If you receive your pension benefits in the form of an annuity and the insurance company becomes unable to pay, a guaranty association may be responsible for all, part or none of your annuity. Generally, where you live at the time the insurance company is unable to pay determines which guaranty association is responsible. In certain circumstances, other factors, such as where the insurance company is licensed to do business, determine which guaranty association may be responsible.
In case a carrier runs into trouble the State Guarantee Associations take over. Companies are generally broken up and lines moved to other carriers.
The guaranty association is composed of all insurers licensed to sell life insurance, accident and health insurance, and individual annuities in the state. In the event that a member insurer is found to be insolvent and is ordered to be liquidated by a court, the Guaranty Association Act enables the guaranty association to provide protection (up to the limits spelled out in the Act) to those who are holders of life and health insurance policies and individual annuities with the insolvent insurer.
For instance, in Connecticut the CT Life and Health Insurance Guaranty Association http://www.ctlifega.org/ would likely be the predominant regulator for participants assuming most annuitants are in Connecticut. It guarantees $500k in present value of annuity payouts.
For information on your state's limits go to http://www.nolhga.com/factsandfigures/main.cfm/location/stateinfo.
How coverage is funded
When an insurer fails and there is a shortfall of funds needed to meet the obligations to policyholders, state guaranty associations are activated. To amass the funds needed to protect the state’s policyholders, insurers doing business in that state are assessed a share of the amount required to meet all covered claims. The amount insurers are assessed is based on the amount of premiums that they collect in that state.
Each guaranty association has dollar limits on the extent of its coverage. In most states, guaranty association coverage limits are $100,000 for individual annuities with an overall benefit “cap” for an individual life of $300,000, though some states have higher maximums. However, state laws vary and can change over time, and different states may calculate the value of annuities differently.
This information is to help you understand the general nature of the guaranty association protection of the annuity you may receive. It is only a summary. If you need information now or in the event the insurance company fails, a list of the addresses and telephone numbers of guaranty association offices is available by contacting PBGC’s Customer Contact Center, PO Box 151750, Alexandria, VA 22315-1750, telephone: 1-(800) 400-7242 or by visiting PBGC’s website at www.pbgc.gov.
Examples (Major companies)
For those that are given an election option by their plan the choice is between keeping your pension, albeit in the form of an annuity from an insurance company, or taking a lump sum. Either way, the PBGC will be out of the equation and the guarantees switch to the Annuity Guarantees discussed below.
PBGC (Pension Benefit Guarantee Corporation) Guarantees
The PBGC is a federal government agency that guarantees pension plan benefits.
However, it is not formally backed by the full faith and credit of the federal government, though, as a government agency, many feel the federal government would step in to secure pensioners benefits if need be. But it is not guaranteed that the government would, in fact, back the PBGC in such circumstances.
After plan assets have been distributed to provide all of the plan's benefits, either through the purchase of an annuity contract or in another form permitted by the Plan, the PBGC’s guarantee of participant benefits ends.
The pension plan may pay pension benefits in the form of an annuity purchased from a licensed insurance company. Once the plan purchases an annuity for participants, the insurance company will be responsible for paying their benefit.
For more check out the FAQ page on the PBGC website: http://www.pbgc.gov/about/faq/pg/general-faqs-about-pbgc.html
Annuity Guarantees
The Insurance industry is heavily regulated. Few major carriers ever get into trouble as the National Association of Insurance Commissioners (NAIC) is charged with seeing and correcting potential issues in advance.
The Insurance Industry, including annuities, is a state regulated industry under the auspices of the State Regulators and the National Association of Insurance Commissioners.
What happens when an insurance company fails? http://www.nolhga.com/policyholderinfo/main.cfm/location/insolvencyprocess
All states, Puerto Rico and the District of Columbia have “guaranty associations.” The purpose of a guaranty association is to protect policyholders up to specified limits in the event the insurance company is financially unable to meet its obligations.
If you receive your pension benefits in the form of an annuity and the insurance company becomes unable to pay, a guaranty association may be responsible for all, part or none of your annuity. Generally, where you live at the time the insurance company is unable to pay determines which guaranty association is responsible. In certain circumstances, other factors, such as where the insurance company is licensed to do business, determine which guaranty association may be responsible.
In case a carrier runs into trouble the State Guarantee Associations take over. Companies are generally broken up and lines moved to other carriers.
The guaranty association is composed of all insurers licensed to sell life insurance, accident and health insurance, and individual annuities in the state. In the event that a member insurer is found to be insolvent and is ordered to be liquidated by a court, the Guaranty Association Act enables the guaranty association to provide protection (up to the limits spelled out in the Act) to those who are holders of life and health insurance policies and individual annuities with the insolvent insurer.
For instance, in Connecticut the CT Life and Health Insurance Guaranty Association http://www.ctlifega.org/ would likely be the predominant regulator for participants assuming most annuitants are in Connecticut. It guarantees $500k in present value of annuity payouts.
For information on your state's limits go to http://www.nolhga.com/factsandfigures/main.cfm/location/stateinfo.
How coverage is funded
When an insurer fails and there is a shortfall of funds needed to meet the obligations to policyholders, state guaranty associations are activated. To amass the funds needed to protect the state’s policyholders, insurers doing business in that state are assessed a share of the amount required to meet all covered claims. The amount insurers are assessed is based on the amount of premiums that they collect in that state.
Each guaranty association has dollar limits on the extent of its coverage. In most states, guaranty association coverage limits are $100,000 for individual annuities with an overall benefit “cap” for an individual life of $300,000, though some states have higher maximums. However, state laws vary and can change over time, and different states may calculate the value of annuities differently.
This information is to help you understand the general nature of the guaranty association protection of the annuity you may receive. It is only a summary. If you need information now or in the event the insurance company fails, a list of the addresses and telephone numbers of guaranty association offices is available by contacting PBGC’s Customer Contact Center, PO Box 151750, Alexandria, VA 22315-1750, telephone: 1-(800) 400-7242 or by visiting PBGC’s website at www.pbgc.gov.
Examples (Major companies)
- AIG – Never reached point of insolvency
- Confederation Life (1994) – Annuities went to Pacific Life http://www.nolhga.com/companies/public/main.cfm?NAICCode=80667
- Mutual Benefit Life (1993) – Annuities went to AIG SunAmerica http://www.nolhga.com/companies/public/main.cfm?NAICCode=66362
- Executive Life (1991) – Annuities (and all other policies) went to Aurora http://www.nolhga.com/companies/public/main.cfm?NAICCode=63010
- Executive Life of NY (1991) – Taken over by New York Liquidation Bureau (NYLB) https://www.nolhga.com/companies/public/main.cfm/NAICCode/61913