This week, Utah Senator Orrin Hatch introduced Bill S. 1270, which, if enacted, would permit state and local governments to transfer their pensions programs to life insurers. The purpose of this bill is to strengthen government pension plans, since, due to the erosion of pension plan assets as a result of the financial crisis, there is generally perceived to be an enormous gap between the pension benefits required to be paid to workers and the funds available to make such payments.

Senator Hatch believes that, because of their experience in investing premiums and with annuities, life insurance companies are well situated to administer government pension plans, which are typically defined benefit plans. In addition, pension plans administered by life insurers will benefit from increased regulatory oversight, since life insurers are required to satisfy capital requirements, to hold a surplus of assets, and to report to regulators about their financial condition and other matters on an ongoing basis. The proposed law includes a change to the federal tax code which would provide the same tax advantage for funds paid to life insurers in order to make pension payments that currently applies to money set aside in public pension funds, so that the possibility that workers could be currently taxed on funds paid to life insurance companies (on basis of an argument that those funds constituted income to the workers) would be eliminated.

The bill has received widespread support from the insurance industry, including the endorsement of MetLife, the NAIC, the American Council of Life Insurers and the U.S. Chamber of Commerce. Some critics of the bill, however, contend that the major problem facing government pension programs is that employers are becoming increasingly delinquent in making their contributions, a problem that would not be solved by allowing life insurance companies to manage these programs.

If the bill becomes law, the potential opportunity for expansion in the life insurance industry will be substantial, and state regulators and legislators can be expected to respond by adopting new statutes and regulations specifically addressing the assumption of public pension plans by life insurers.

To view the text of the proposed bill, please click here.