Sen. Orrin Hatch’s Secure Annuities for Employee (SAFE) Retirement Act would benefit the life insurance industry, Moody’s Investors Service found in their most recent credit outlook released one week after the bill was introduced in the Senate.
The bill, introduced on July 9, would allow the private market to assist state and local governments with their pension liabilities. Currently, these plans are woefully underfunded with varying ominous estimates being released as of late.
The private market in this case would be state-licensed, major life insurers with extensive experience administering retirement business that also have sizeable assets under management. These large insurers would sell market-based, fixed annuity contracts to local governments through a bidding process.
Senator Hatch, in his own report on underfunded pensions, released in 2012, found that underfunding of state and local pensions could surpass $4 trillion. Moody’s feels that even a fraction of that amount will, “ensure the life insurance industry a significant amount of volume.”
Moody’s finds these new net inflows — which companies will realize when a contract is won — will benefit the insurers due to the fact that they will represent new money being managed as opposed to the defined benefit/defined cost pension market where new business is usually derived from the churning of assets from existing providers.
In their credit outlook, Moody’s lauded the industry’s “expertise with asset liability and investment management” as reasons why the life insurance contracts, namely fixed annuities, would be a good solution to the pension crisis.
However, not everyone feels the industry is prepared for such responsibility. Birny Birnbaum, executive director of the Center for Economic Justice and an NAIC consumer advocate said, “Insurers’ history of misjudging long-term products, turning public pensions over to private insurers looks like fee-harvesting time for insurers. Given the wide variation in regulatory resources and capabilities by state, this proposal is even more worrisome.”