The Office of General Counsel issued the following opinion on November 14, 2005, representing the position of the New York State Insurance Department.
Re: Life Insurance Guaranty Corporation of New York/Coverage of Pension Plans
Issues:
1. If the life insurance company that issued the life insurance policy or annuity contract through which the benefits are funded becomes insolvent, does New York State guaranty the pensions provided by a private employer?
2. If so, is there also coverage from the Pension Benefit Guaranty Corporation ("PBGC")?
Conclusions:
1. New York State does not guaranty pensions provided by a private employer. However, policies and contracts issued in New York by authorized life insurers are protected by a private entity, the Life Insurance Guaranty Corporation of New York ("LICGC"). The extent of the coverage is set forth below.
2. Since the protections of the PBGC are triggered by termination of a pension plan, the insolvency of the life insurer issuing an annuity contract would not, in and of itself, implicate the benefits of the PBGC.
Facts:
The inquirer's client is an employer in New York that has established a defined benefit pension plan for its employees. The plan has been funded through the purchase of a group annuity contract from a domestic insurance company authorized to transact the business of life insurance in New York.
Employer and employee contributions, after deduction of an amount sufficient to pay the plan's administrative expenses, are transmitted to the insurer. Although the insurer provides the option of investing in equities through a Separate Account, the client has opted to place all contributions in the insurer's General Account. Contributions to the insurer are not allocated to any particular employee, but are credited in the aggregate to the account of the plan.
When an employee decides to retire, the insurer calculates the actuarial amount required to fund annuity payments for the individual under the provisions of the plan, including any payment options available to the employee, transfers that amount to a sub-account allocated to the employee, and issues an annuity certificate to the now retired employee.
The inquirer asked why, if the State of New York guarantees the pensions upon the insolvency of the insurer, was is necessary to pay contributions to the PBGC.
Analysis:
The LICGC was established by New York Insurance Law § 7706 (McKinney 2000):
(a) There is created a not-for-profit corporation to be known as "The Life Insurance Company Guaranty Corporation of New York". . . . All member insurers shall be and remain members of the corporation as a condition of their authority to transact insurance in this state. . . .
(b) The corporation shall come under the immediate supervision of the superintendent and shall be subject to the applicable provisions of this article.
The relevant definitions for the operations of the LICGC are set forth in New York Insurance Law § 7705(d), (j) & (k) (McKinney 2000):
(d) Covered policy means any of the kinds of insurance specified in paragraph one[life insurance], two [annuities]or three [health insurance] of subsection (a) of section one thousand one hundred thirteen of this chapter . . . .except that any certificate issued to an individual under any group policy or contract shall be considered to be a separate covered policy for purposes of section seven thousand seven hundred eight of this article.
(j) Person means any individual, corporation, partnership, association or voluntary organization.
(k) Resident means any person to whom contractual obligations are owed and who either (1) resides in this state at the time a member insurer is determined to be an impaired or insolvent insurer, or (2) resided in this state at the time a member insurer issued a covered policy to such person.
The client was advised to consult its own attorney as to whether it is a "resident" within the meaning of New York Insurance Law § 7705(k).
New York Insurance Law § 7708(a) (McKinney 2000) provides:
If a domestic insurer is an impaired or insolvent insurer, the corporation shall with the approval of the superintendent:(1) guarantee, assume or reinsure, or cause to be guaranteed, assumed or reinsured, the covered policies of residents, or arrange for replacement by policies found by the superintendent to be substantially similar to such covered policies; (2) assure payment of the contractual obligations of the impaired or insolvent insurer to residents . . . . The aggregate liability of the corporation under this subsection shall not exceed five hundred thousand dollars for all benefits . . . with respect to any one life or, to the extent benefits are not allocated pursuant to a covered policy to any one life, to any one covered policy; provided, however, . . . (ii) that the corporation shall be liable under this subsection in an amount not to exceed one million dollars for all benefits, including cash values, with respect to any group annuity contract (or portion of any such contract) that does not guarantee annuity benefits with respect to any specific individual identified in the contract . . . .
The extent of LICGC protection for an individual participant under a group annuity depends upon the insurers obligation as set forth under the contract. If the contract does not guarantee annuity benefits with respect to any one specific individual identified in the contract, the LICGC will provide coverage for the total invested with the insurer, up to $1 million. However, if the contract does guarantee annuity benefits with respect to specific individuals identified in the contract, then the LICGC will provide up to $500,000 of coverage to such individuals who are New York residents. Questions concerning the LICGC may be addressed to:
Life Insurance Guaranty Corporation of New York
c/o Carl Micarelli, Esq.
Debevoise & Plimpton
919 Third Avenue
New York, NY 10022.
Pension plans of commercial private employers are regulated pursuant to the Employee Retirement Income Security Act (ERISA) as an employee pension benefit plan, 29 U.S.C.A. § 1002(2)(A) (West 1999):
The term "employee pension benefit plan" . . . mean any plan, fund, or program which was heretofore or is hereafter established or maintained by an employer or by an employee organization, or by both, to the extent that by its express terms or as a result of surrounding circumstances such plan, fund, or program--(i) provided retirement income to employees, or (ii) results in a deferral of income by employees for periods extending to the termination of covered employment or beyond, regardless of the method of calculating the contributions made to the plan, the method of calculating the benefits under the plan or the method of distributing benefits from the plan.
The PBGC was created as part of ERISA and is governed by 29 U.S.C.A. § 1301 et seq. (West 1999). The enacting statute, 29 U.S.C.A. § 1302(a) (West 1999 and 2005 Supplement), provides:
Establishment within Department of Labor. There is established within the Department of Labor a body corporate to be known as the Pension Benefit Guaranty Corporation. . . . The purposes of this title, which are to be carried out by the corporation, are--(1) to encourage the continuation and maintenance of voluntary private pension plans for the benefit of their participants,(2) to provide for the timely and uninterrupted payment of pension benefits to participants and beneficiaries under plans to which this title applies, and (3) to maintain premiums established by the corporation under section 4006 at the lowest level consistent with carrying out its obligations under this title.
The protections of the PBGC are triggered by the termination of a private pension plan. While most private pension plans are covered by the PBGC, there are exceptions to coverage set forth in 29 U.S.C.A. § 1321 (West 1999).
The insolvency of an insurer would not, in and of itself, result in the termination of a pension plan. Questions concerning the coverage provided by the PBGC for pension plans funded by life insurers and the interplay between the PBGC and the LICGC should be addressed to:
Judith Starr, Esq.
General Counsel
Pension Benefit Guaranty Corporation
1200 K Street NW
Washington, DC 20005.
For further information please contact Principal Attorney Alan Rachlin at the New York City office.