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The Value Of Working with an Independent Pension Risk Advisory Firm

When it’s time for an organization to consider an exit strategy with its frozen pension plan, it will inevitably rely upon its advisors and service providers to assess the feasibility of various terminal funding options. A plan sponsor might look for input from its actuary, plan administrator, investment advisor and ERISA attorney. Many will also engage an insurance broker with expertise in the pension group annuity market, since the decision to transfer pension obligations to an insurance company is in itself a regulated fiduciary act. Unfortunately, with so many consulting firms now delving into pension risk transfer as an ancillary service, many are not truly in a state of independence in this role.

This paper takes a look at the value of independence in the annuity search and placement process, and why plan sponsors and advisors should consider making “independence” a key factor when choosing a partner to assist with the transfer of pension liabilities to an insurance company.

The dictionary defines the word “independent” as:
1. Being free from outside control; not depending on another’s authority
2. Not depending on another for livelihood or subsistence
Why is it important to be “free from outside control” when it comes to pension risk transfer advice?

Protecting Confidential Information
Many actuarial firms, plan administrators and investment advisors are part of larger global organizations of financial professionals, while many of them also do significant business with specific insurance companies.

These organizations advocate the well-known concept of the “Chinese Wall”, such as claiming that their businesses operate independently from each other, to make clients feel comfortable that there is strict adherence to customer confidential information within their organizations. However, since these operations were constructed and affiliated to specifically leverage and cross-sell their services, one should question whether such a “Chinese Wall” or “independence” really exists.

Executives serving as plan fiduciaries wear two hats. As executives, they make business decisions outside of the pension plan and fiduciary responsibility. In general, the fiduciary hat then goes on after those decisions are made, with a focus on implementing those business decisions in the best interest of plan participants. For this reason, most plan sponsor executives/fiduciaries should expect and demand complete confidentiality when assessing terminal funding options. This includes confidentiality of all secure plan and participant data, and confidentiality that a plan termination and liability settlement are even being considered in the strategic planning stage.

When obtaining initial annuity quotes for strategic planning purposes, neither the name of the plan sponsor nor the actual participant data needs to change hands with potential insurance carriers. This only needs to occur when decisions to move forward have been made.

Imagine if word got out to employees that their pension plan might be terminated, or that a group pension annuity purchase is being considered, years before that actually might happen. This could cause an employee relations nightmare. Such things have happened merely because the non-fiduciary act of conducting feasibility assessments leaked out long before any decisions were made.

Finally, imagine confidential, personal data (i.e., names, SSNs, dates of birth) being misused or stolen through unsecured email because two parties that do a lot of business together exchanged data files and client names before it was appropriate to do so.

A truly independent pension risk advisory firm should have the capability to quote liability settlements from multiple insurance companies anonymously, without exchanging confidential data, and have no business affiliations that compete with the best interests of the plan sponsor.

Conflict Free With Annuity Price Negotiations
The second key area where independence drives value for pension plan sponsors is price negotiations. This starts with expertise in the areas of insurance brokerage and underwriting. Are brokerage and underwriting your pension risk advisor’s primary business or an ancillary business designed to keep independent advisors and fresh perspectives out while creating extra revenue in the process?

A truly independent annuity broker will have:
1. Inside knowledge of all major carriers providing “safest available” pension annuities
2. Understanding of evolving capacities and appetites for taking on new annuity business
3. Lack of bias to avoid directing business to preferred carriers of the pension risk advisor
4. Unwavering commitment to drive every carrier to their best offer with each transaction and each round of bidding while not tipping off select carriers to other carrier’s pricing

Some pension risk advisors are controlled by other companies or service lines in their organization such as their actuarial services, an affiliated investment advisory firm or connections with an insurance company with which they do a lot of business.

Inherent conflicts of interest that arise include:
1. Ongoing service providers lose recurring fees when a plan is terminated (many will purposely underestimate pension risk advisory fees and then charge exhorbant fees for plan termination work)
2. Plan administrators are often affiliated with actuarial or investment firms; they lose annual per head fees when liability settlements occur
3. Investment advisory firms lose fee revenue after annuity purchases and lump sums when fees are tied to the amount of assets under management
4. Certain insurance companies compensate incumbent consultants more than other insurers for engaging in pension annuity business, or for providing other services to those insurance companies. At the same time those incumbents are often engaged by the plan sponsor to negotiate annuity pricing with those same insurance companies.

It’s important to be mindful of the potential competing influences that may exist when engaging with firms that are not truly “independent”. The risk of not doing so could, at the very least, add additional costs for the plan sponsor. At worst, it could compromise the plan sponsor’s confidential information and lead to a change in service providers and advisors. None of these scenarios are worth the risk and can be easily managed upfront by hiring an independent pension risk advisor.

DIETRICH is a truly “independent” pension risk advisory firm, meaning we have no obligation or reliance to others nor do we receive remuneration from others that could cause a conflict of interest or in any way compromise our objectivity in our providing of services to our clients. Our Dietrich Direct Quote (DDQ) proprietary system allows plan sponsors to conduct feasibility assessments and monitor the annuity market on an anonymous basis until it is time to move forward.

We do not provide actuarial, plan administration or investment advisory services. Pension annuity settlements, plan terminations and other risk transfer solutions have been our core business since 1980.

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