How safe is your pension? As COVID-19 shutdowns hobble the U.S. economy, the question has taken on more urgency.
While risks associated with underfunded pensions for state and local government employees have been known for years, a new concern has arisen, pension rights advocates say. It centers on the growing trend of insurance companies taking over pensions for employees of private companies.
“This is what we’ve worried about — when companies sell off their pension plans,” said Karen Friedman, policy director at the Pension Rights Center, a nonprofit focusing on workers’ retirement security. “Is it safe to transfer money out of pension plans insured by the [government-backed] Pension Benefit Guaranty Corporation to insurance companies where the protections for consumers are scant?”
Pension obligations are costly and companies have been eager to jettison them in recent years. Insurers have been happy to take on their assets — such deals have totaled $110 billion since early 2015.
But pensions taken over by private insurers are not protected from default by the government-backed PBGC, which protects the pensions of most private company employees. In addition, insurers are regulated by the states, not the federal government, and some are now affiliated with private equity firms, whose focus is often on short-term profits which can conflict with insurers' long-term obligations.
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Insurance company Athene Holding, a relative newcomer to the arena, has vaulted to the number-two position in pension buyouts. Created in 2009, Athene is affiliated with Apollo Global Management, the publicly traded private equity giant co-founded by billionaire Leon Black. Athene, whose stock trades publicly, is Apollo’s biggest investment. Apollo has $330 billion in assets under management, with over $100 billion related to Athene, its filings show. The insurer pays significant fees to Apollo each year — Athene's investment management fees to Apollo accounted for 27 percent of Apollo's total such fees in 2019.
Athene has acquired $12 billion in corporate pension obligations recently, including those of Bristol-Myers Squibb, Dana Corp. and Lockheed Martin Corp. Today, roughly 178,000 people rely on Athene for pension benefits, the company says. The entity taking most of the obligations is Athene Annuity & Life Co.
Athene Holding has performed well, but in the first quarter of 2020, it reported a $1.1 billion loss, in part reflecting financial market turmoil. Some $300 million of that loss came from Athene’s 7 percent stake in Apollo.
Financial markets have recovered since March 31, shoring up Athene’s Apollo holding.
Still, the loss raises questions about risks in Athene’s investments.
Researchers at the Federal Reserve Board published a paper in February warning of risks among a handful of insurers that are structured like Athene. The study, which cited Athene as an example, concluded, “Life insurers have become more vulnerable to an aggregate shock to the corporate sector.”
Joseph M. Belth, professor emeritus of insurance at Indiana University and a longtime authority on the industry, told NBC News that he thinks private equity firms like Apollo are not well-suited to partner with insurance companies.
“I think private equity firms are in it for the quick buck and that is what troubles me,” Belth said. “Policyholders are pawns in the hands of people like Black.”
Asked to respond, Joanna Rose, a spokeswoman for Apollo and Black said in a statement that Athene’s and Apollo’s interests are closely aligned. “Athene was founded with long-term capital from blue-chip insurance investors, not from a private equity fund,” she said. "Athene does not invest in Apollo’s flagship PE funds, nor does it lend to Apollo’s PE portfolio companies."
Athene's spokeswoman, Karen Lynn, said in a statement: "Athene strongly disagrees with various characterizations of our business asserted in this article. We are highly rated, disciplined and financially strong as one of the best-capitalized businesses in the financial sector."
8.6 million Americans
About 8.6 million Americans over 65 are receiving pension payments from a private company plan, and millions more who are still working are paying into private plans. Most of those plans are insured through the government-backed Pension Benefit Guaranty Corporation. PBGC says it protects around 40 million workers in 23,400 pension plans.
When a company defaults on its pension obligations, PBGC pays the pension, in most cases. Some 84 percent of participants in private company plans taken over by the PBGC received all their vested benefits, a 2019 study showed. The remaining 16 percent saw their benefits fall by an average 24 percent. As of 2019, PBGC has assumed the pension obligations of almost 5,000 plans and more than 900,000 retirees.
When private insurance companies take over pension plans, they typically offer participants a group annuity that pays the same amount as the private plan. An annuity is an insurance contract that can provide lifetime monthly income. The U.S. Department of Labor, which oversees enforcement of pension rules, has not objected to these takeovers.
However, those pensions are no longer backed by the PBGC. They are backed by the insurers, which must be disclosed when the transfer takes place.
Insurers are not regulated by the federal government. That task falls to each state in which the companies do business.
Athene Holding is based in Bermuda, while its unit Athene Annuity & Life Co. is in Iowa. In April, the New York insurance overseer accused Athene Holding of failing to register its pension takeover business there. Athene Holding paid $45 million to settle the matter, neither admitting nor denying the allegations.
State insurance regulators require insurers to file annual reports detailing their investment portfolios and the assets they have to cover policyholders’ claims. The key figure — surplus — is the difference between an insurer’s assets and liabilities. The bigger the cushion, the better.
Athene Annuity & Life, the insurer backing most of the pension obligations, has $54 billion in assets, filings show. And a $1.2 billion surplus — which is roughly $1 billion above the level at which the regulator overseeing the company would have to move in to protect policyholders.
If an insurance company gets into trouble, its assets are sold to pay policyholders' claims. If insufficient, policyholders must rely on state guaranty funds financed voluntarily by other insurers. Unlike the Federal Deposit Insurance Corporation, which has a pre-funded insurance pool protecting depositors against bank failures, state guaranty funds raise money only after a failure occurs.
States impose limits on how much policyholders can receive in a failure. In Alabama, Colorado and Iowa for example, the most annuity holders can receive is $250,000.
When Athene Annuity & Life takes over a pension, it receives assets backing those obligations from the company that formerly ran it. Athene sends 80 percent of those assets and liabilities to an affiliated reinsurer in Bermuda, the company’s filings say, and keeps the remaining 20 percent in U.S. entities.
Thomas Gober, a certified fraud examiner in Virginia who analyzes insurance companies and has worked as a consultant to and witness for the U.S. Department of Justice, questioned Athene’s heavy reliance on related companies to reinsure or backstop its policyholder obligations.
“A strong group of independent, well-capitalized reinsurers can strengthen an insurer’s financial backbone,” said Gober.
In a typical reinsurance or coinsurance arrangement, an insurer will pay an unrelated company to provide a backstop to cover the initial insurer’s obligations if necessary. Under such an arrangement, the initial and secondary insurers share profits and losses based on a preset ratio.
Athene Annuity & Life’s most recent regulatory filings show 95 percent of its reinsurance and coinsurance deals were with affiliates — $54 billion of $57 billion. This defeats the purpose of a backstop, Gober said. New York Life Insurance Co., which carries the highest ratings from Moody's and Standard & Poor's, has zero reinsurance or coinsurance deals with affiliates.
One affiliated reinsurer is Athene Re USA IV, which provided a $1.4 billion backstop to Athene Annuity & Life as of 2019. The reinsurer’s risk-based capital falls well below mandatory levels, under National Association of Insurance Commissioners’ rules, filings show. That’s because one of the assets it uses to compute its capital — letters of credit for $137 million — is not admitted per the NAIC. Its rules don’t allow letters of credit as assets because they represent the risk of a bank, not the insurance company, said David Provost, deputy commissioner of the captive insurance division of the Vermont department of regulation.
Vermont regulators, where Athene Re is domiciled, did allow the letters of credit to be included as an asset. “We are making a regulatory judgment that this is acceptable,” said Provost. He did not disclose the identity of the banks backing them.
Karen Lynn, a spokeswoman for Athene, said its Bermuda-based reinsurers are strong and have capital “consistent with a AA-rated company.” (An AA rating is considered high quality; AAA is the highest.)
But outsiders can't analyze the reinsurers' books because Bermuda doesn't require extensive public disclosures. Athene’s annual Bermuda filings consist of 5 pages and few details, versus the Iowa subsidiary’s over 1,000-page annual state filing. And policyholders can typically collect only from the insurer that wrote their policies, which is why the $1.2 billion in surplus held by Athene Annuity & Life Co. should be the focus, according to Gober.
Policyholders who are unfortunate enough to get caught up in an insurance company failure face another challenge: litigation can drag on for decades. In January 2020, for example, a federal appeals court ruled on a case involving money owed on an annuity written by Executive Life. That company failed in 1991.
After Executive Life collapsed, many of the insurer’s assets were picked up at significant discounts by Black’s firm, Apollo.
‘Special and symbiotic’
The relationship between Apollo and Athene, the subsidiary that backs pensions, is “special and symbiotic,” Black told investors in March.
For Apollo, the arrangement is lucrative. Over the past three years, Athene has paid Apollo $1 billion in management fees.
For Thomas Gober, however, the relationship between the companies is problematic. There is nothing illegal about Athene's practices, but Gober sees problems with the company's relatively thin surplus, the quality of Athene’s investments, and the habit of Athene of investing in Apollo-related entities. Apollo owns 35 percent of Athene, and Athene owns seven percent of Apollo.
The Federal Reserve researchers also expressed concerns, concluding that private-equity backed insurers may test the ability “of the insurance industry, and the financial system more broadly” to withstand “direct and indirect shocks to the corporate sector."
The Athene spokeswoman said the Fed report did not provide "comprehensive insight into how we manage our business. We have maintained, and will continue to maintain, very strong liquidity within our diversified investment portfolio, and we take great care to invest behind predictable, surrender charge protected, long-dated policyholder obligations."
In a corporate pension buyout, a company, say Bristol-Myers, hands its pension assets and obligations over to Athene. To meet these obligations, insurers typically invest policyholders’ money in corporate bonds, government obligations, and mortgages.
When an insurance company sells a policy or annuity, it agrees to pay the holder a set amount under certain circumstances. To meet these obligations, insurers typically invest policyholders’ money in corporate bonds, government obligations, and mortgages.
With Apollo guiding Athene’s portfolio, the insurer has invested heavily in Apollo-related entities, regulatory filings show. Athene Annuity & Life holds $4.1 billion in stocks, bonds and mortgage loans of its "parent, subsidiaries and affiliates," up from $172 million in 2015.
Compared with the insurer’s surplus of $1.2 billion, this is a troubling concentration of assets, said Gober.
“That’s too many eggs in one basket and an affiliated basket,” he said. “If the insurer gets into trouble, the question would be whether the affiliates’ bonds would be collectible because the affiliates are so dependent upon the insurer for revenues.”
By comparison, Prudential Annuities Life Assurance Corp. has total assets of $54 billion and surplus of $6.4 billion — roughly the same assets as Athene but five times the surplus. Its investments in parent, subsidiaries and affiliates total just $231 million.
NBC News asked Lynn, the Athene spokeswoman, how its policyholders can be sure these investments are good for them and not just good for Apollo affiliates. Because Apollo owns 35 percent of Athene, she said it is "completely aligned with all Athene stakeholders to find the highest quality risk-return assets for Athene’s balance sheet as possible." She also said Athene's investment in Apollo shares would not be used to pay insurance policyholders’ claims, including pension benefits.
Bill Wheeler, Athene's president, said in a statement: "The premise of your story contains the assertion that an affiliation with Apollo means more risk. This is clearly untrue." Moreover, all of its pension takeovers "have been vetted and selected by plan fiduciaries and committees whose sole responsibility is to consider the interest of participants and beneficiaries."
Asked how Athene shareholders and policyholders can assess whether amounts paid in investment management fees to Apollo are fair, Lynn said Athene’s relationship with Apollo has fueled the insurer’s high performance in recent years.
To manage the conflicts of interest arising from Athene’s ties to Apollo, Lynn said the company’s board has a committee that approves the deals. The transactions are also vetted by disinterested directors at Athene, with both groups advised by independent legal and financial advisers.
The conflicts committee “is comprised solely of directors who are independent of Apollo,” she said.
But the Athene proxy filings show all three conflicts committee members are or were directors of Apollo affiliates, including Apollo Residential Mortgage Inc., Apollo Tactical Income Fund and Apollo Commercial Real Estate Finance, Inc.
Asked about these affiliations, Lynn said Athene’s governance practices adhere to requirements set out by the New York Stock Exchange, where its shares trade. Athene declined to make the directors available.
While corporate bonds dominate Athene’s investments, it is also a big buyer of commercial mortgages and securities that bundle debt together, known as collateralized loan obligations. The company also holds securities backed by aircraft leases, retailers, oil companies, car rental companies and hotels, all hurt by COVID-19 closures.
Gober studied thousands of pages in regulatory filings of Athene’s major subsidiaries comparing risks in their investments with the cushion the companies have to pay policyholder claims — the surplus.
“The biggest problem with the investment portfolio is it is high risk and illiquid,” Gober told NBC News. “Given how thin their surplus margins are, it’s relevant to compare how much more they have in risky stuff.”
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Lynn disputed the view that the company’s policyholders face risks. “There is absolutely no evidence to suggest that any of our subsidiaries are inadequately capitalized,” she said, “when considering the strength and accessibility of capital across our consolidated business. Athene has more than $12 billion of consolidated statutory capital supporting $112 billion of policyholder reserves, reflecting a ratio which is meaningfully higher than other A+ and AA- rated insurers, as well as other fixed annuity providers."
The quality of Athene’s investments raises questions as well, said Gober. Its most recent filings show more than one-quarter of the securities it intends to sell before they mature were either nonrated or rated below investment grade by agencies such as Moody’s Investors Service and Standard & Poor’s.
Asked whether policyholders should be concerned about these holdings, Athene says it prefers to use the ratings method put forward by NAIC. Under this system, only 5.7 percent of the securities are rated below investment grade, its filings say.
Athene’s filings also warn that “many of our invested assets are relatively illiquid,” meaning potentially difficult to sell. The company relies on Apollo for risk management support, its filings say.