Archive for category: Updates

Concerns about pension benefits being transferred to private equity owned insurers were front and center at today’s Senate Banking Committee hearing.

Senator Brown opened the hearing by remarking on Lockheed Martin’s transfer of $4.3 billion of pension obligations to Athene, owned by Apollo Global Management.

Senator Brown said,

“Overnight, Lockheed Martin employees and retirees were notified that their pensions would be managed by Athene and no longer covered by ERISA or the Pension Benefit Guaranty Corporation. Many employees are exceptionally nervous about that. It’s one recent example of private equity giants’ expansion into people’s pensions and into the insurance industry. We know that workers end up worse off when Wall Street private equity firms get involved. We’ve seen it over and over again in industry after industry.”

In questions to Steven Seitz, Director of the Federal Insurance Office, Brown asked about this loss of federal protections and what risks could be posed to workers and the broader financial system.

Senator Elizabeth Warren asked Seitz if pension benefits transferred to Athene are as financially secure as they were before the transfer.

Senator Warren said,

“Exposing Americans’ retirement savings to more risk is exactly how private equity makes its money. Riskier and more complex investments mean that private equity-backed insurers can jack up their returns and their short-term profits, but the pensions are more vulnerable to being wiped out by a market downturn which endangers the insurance company’s solvency… For example, one fifth of Athene’s portfolio is invested in risky asset backed securities and leveraged loans made to companies that are already highly in debt. Even worse, many of Athene’s risky investments are created or managed by the parent company, Apollo, itself. This means that Apollo collects fees on the investments that it directed its insurance arm to make… This is a problem of more risk, and the risk is borne by people who have invested for all their working lives in their retirement security.

Senator Warren called for federal and state insurance regulators to step up and address the risks that private equity poses to pensioners and workers.

“I appreciate that Treasury and NAIC are looking at this issue closely, but enough studying. It is time to act. I look forward to working with both of your offices to ensure that happens.”

On March 16, 2022, Senate Banking Committee Chairman Sherrod Brown wrote to the National Association of Insurance Commissioners (NAIC) and the Federal Insurance Office (FIO) of the U.S. Treasury Department highlighting concerns about private equity’s growing role in the insurance industry and asking the two regulatory bodies to further study the issue and report to Congress no later than May 31, 2022.

According to the Senator’s letter,

“Investment firms like asset managers and private equity funds often take on much higher risk strategies than traditional insurance companies, and do not face all of the same capital, liquidity, and policyholder protection requirements as well-regulated insurance companies. Consequently, many workers who chose to invest their retirement savings in conservative and long-lived insurance firms now find themselves paying premiums to much riskier firms with less experience in the insurance business. While investment firms might benefit from huge profits in the short term, failure to adequately manage these risks may ultimately cost policyholders their retirement incomes.”

Senator Brown’s letter also expressed concern about the growing presence of private-equity-backed life insurers in the pension risk transfer (PRT) market and specifically referenced several recent PRT transactions, including Athene’s assumption of pension obligations to workers and retirees of Lockheed Martin and Alcoa.

Below are the questions Senator Brown asked FIO and NAIC to examine:

1. What risks do the more aggressive investment strategies pursued by private equity-controlled insurers present to policyholders?
2. What risks do lending and other shadow-bank activities pursued by companies that also own or control significant amounts of life insurance-related assets pose to policyholders?
3. Are there risks to the broader economy related to investment strategies, lending, and other shadow-bank activities pursued by these companies?
4. In cases of pension risk transfer arrangements, what is the impact on protections for pension plan beneficiaries if plans are terminated and replaced with lump-sum payouts or annuity contracts? Specifically, how are protections related to ERISA and PBGC insurance affected in these cases?
5. Given that many private equity firms and asset managers are not public companies, what risks to transparency arise from the transfer of insurance obligations to these firms? Will retirees and the public have visibility into the investment strategies of the firms they are relying on for their retirements?
6. Are state regulatory regimes capable of assessing and managing the risks related to the more complex structures and investment strategies of private equity-controlled insurance companies or obligations? If not, how can FIO work with state regulators to aid in the assessment and management of these risks?