Private Pensions:

Millions of Workers Lose Federal Benefit Protection at Retirement

HRD-91-79: Published: Apr 25, 1991. Publicly Released: Apr 25, 1991.

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Joseph F. Delfico
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Pursuant to a congressional request, GAO reviewed the protection available to retirees receiving benefits from insurance companies in case of insurance company failure, focusing on: (1) how many retirees received their benefits from insurance companies; (2) whether federal and state guarantees were available for those annuitants; and (3) recent financial difficulties in the insurance industry.

GAO found that: (1) insurance industry and government data indicated that 3 million to 4 million retirees and surviving dependents of retirees received annuities that their pension plans purchased from life insurance companies; (2) even though the Employee Retirement Income Security Act of 1974 (ERISA) guaranteed pension plan benefits, those pensioners lost the guarantee when they became dependent on insurance companies for retirement income; (3) many retirees holding such annuities were unaware that federal pension plan guarantees did not extend to them; (4) without federal guarantees, pensioners holding such annuities relied on state guarantees, which sometimes provided incomplete coverage; (5) as of March 1991, three states and the District of Columbia still lacked insurance annuity guarantee provisions; (6) since state laws generally guaranteed a smaller portion of benefits than federal guarantees, some annuitants were unprotected, or only partially protected, if the insurance companies providing their annuities went out of business; (7) it was difficult to determine the extent of potential annuitant losses due to limited data, but industry and government data suggested that no retiree had lost benefits to date; and (8) since 1975, 170 life insurance companies have failed, of which 40 percent failed between 1988 and 1990.

Matter for Congressional Consideration

  1. Status: Closed - Implemented

    Comments: The Pension Benefit Guaranty Corporation (PBGC) issued an interim regulation, effective December 16, 1991. The regulation requires employers to inform plan participants that PBGC guarantees are extinguished upon distribution of plan assets in full satisfaction of a participant's liabilities.

    Matter: ERISA was passed to protect the interests of participants in pensions plans. Because 3 million former participants have lost this protection, Congress may wish to consider approaches for extending federal protections to retirees receiving insurance annuities. In extending those protections, Congress will need to consider what additional funding, administrative, and regulatory provisions would be necessary. At a minimum, Congress should consider requiring pension plans that purchase insurance annuities to inform their current workers and past retirees that these annuities are not federally guaranteed.


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