Two values particularly mark this year’s 2014 MetLife Qualified Retirement Plan Barometer (QRPB) survey of Fortune 1000 retirement plan sponsors: income and simplicity.
The survey found that 57 percent of defined contribution (DC) plan sponsors that don’t include an income annuity are taking a “serious look” at lifetime income options, 34 percent have explored offering such options and 11 percent have conducted due diligence regarding companies that offer lifetime income options.
“DC-only plans sponsors are taking a serious look at lifetime income,” said David DeGeorge, vice president of life and income funding solutions for MetLife.
A new plan sponsor survey offers insights into the issues regarding retirement income adoption by workplace retirement plans. Service providers may find it instructive in anticipating and meeting plan needs.
More than a third of 212 plan sponsor respondents (37%) agree that solvency determination (i.e., evaluation of the annuity provider to ensure that its solvency is adequate to make all future payments to the annuitants(s)) is the most pressing issue that still needs to be addressed to ensure a workable safe harbor. According to the MetLife 2016 Lifetime Income Poll, this rises to 47% among those who are extremely or very familiar with the proposed amendments to the safe harbor.
Three-quarters (76%) of respondents say that in determining the adequacy of the solvency of a potential annuity provider for their defined contribution plan, they would prefer to be permitted to rely on certifications from the annuity provider based on the regulatory process carried out by a state insurance commissioner, rather than to conduct the solvency due diligence process themselves as part of their regular due diligence process for plan providers.
In remarkably unusual public statements, Treasury Secretary Jacob Lewhas aggressively criticized U.S. District Court Judge Rosemary Collyer’s legal decision to invalidate the Financial Stability Oversight Council’s designation of MetLife as a systemically important financial institution (SIFI).
Mr. Lew asserts that Judge Collyer overturned FSOC’s conclusion thatMetLife is a SIFI and that her decision contradicted key policy lessons from the financial crisis. He’s wrong. Judge Collyer makes no specific determination as to whether MetLife is a SIFI and certainly does not base her judicial decision on the policy lessons of the financial crisis.
Importantly, Dodd-Frank also provides companies designated as SIFIs with the right to promptly challenge FSOC’s decision in court. MetLife is the only designated company to do so, and Judge Collyer found in its favor on March 30th.The government has already filed an appeal with the D.C. Circuit and the case could ultimately be heard by the Supreme Court.
The Financial Stability Oversight Council is a financial regulatory agency created by Dodd-Frank. It is chaired by Secretary Lew and includes the heads of the eight financial regulatory agencies. One of its principle tasks is to identify financial institutions whose failure could pose a threat to the financial stability of the United States and then designate these entities as SIFIs. The stakes are high for companies designated as systemically important financial institutions because they are subject to enhanced supervision by the Federal Reserve and more stringent capital and liquidity requirements.
Judge Collyer found three procedural failures in FSOC’s designation ofMetLife as a SIFI, each of which was sufficient to overturn FSOC’s determination on its own. Whatever the merits of designating a financial institution as systemically important, such determinations should follow the rule of law.
A court must decide if FSOC has properly assessed whether the failure of the designated financial institution could in fact threaten the financial stability of the United States. Judge Collyer found that FSOC did not do so with the rigor required by law. According to Judge Collyer, “every possible effect of MetLife’s imminent insolvency was summarily deemed grave enough to damage the economy.”
Not only did the Financial Stability Oversight Council not abide by legislative requirements, the judge also found that it violated the process required by its own rules. According to the FSOC’s 2012 rule-making and guidance, FSOC said it would consider the likelihood of a non-bank’s failure as part of the designation process. However, the record clearly shows that FSOC failed to consider MetLife’s vulnerability. When an agency takes an action that is directly inconsistent with its own rule-making, longstanding legal doctrine holds that the action is invalid because it is “arbitrary and capricious.”
Indeed, it was not the court that imposed requirements on the Financial Stability Oversight Council, as Mr. Lew argues, it was the FSOC itself. Of course agencies should be bound by their own rules — if agencies were free to disregard their own rulemakings, then their actions would be entirely unpredictable.
Mr. Lew additionally argues that Judge Collyer’s decision requires thatFSOC conduct a formal cost-benefit analysis as part of a SIFI designation, even though no such analysis is required by the legislation. But JudgeCollyer’s decision does not require a cost-benefit analysis. In JudgeCollyer’s view, Dodd-Frank requires that the Financial Stability Oversight Council consider whether a systemically important financial institution designation would pose a risk to MetLife or to financial markets. This is a far lower standard than requiring that the FSOC measure the costs of designation and make sure that they are less than the benefits.
Judge Collyer’s legal decision would simply require that the Financial Stability Oversight Council follow a regulatory process that provides the public with transparency and certainty, instead of arbitrary determinations. Mr. Lew should make sure that FSOC follows the rule of law. Judge Collyer’s legal decision had nothing to do with the question of whether the SIFI designation approach is a legitimate response to the financial crisis.
• Hal S. Scott is professor of international financial systems at Harvard Law School and director of the Committee on Capital Markets Regulation
Long before MetLife Inc. Chairman and Chief Executive Steven Kandarian won his legal showdown with the U.S. government, he faced doubters inside his own boardroom.“What are the chances that we will win?” one skeptical director asked before the giant insurer sued its regulators, according to a person familiar with the situation. “On the better side,” he answered, according to another person familiar with the conversation. The decision to take on the federal government was a major gamble for the 64-year-old Mr. Kandarian, a low-key executive known for his caution and reserve.
MetLife was one of four nonbanks tagged by U.S. regulators as a threat to the financial system, but it was the only company to go to court to challenge that designation and the extra layer of regulation it brings. The challenge risked customer and regulator opprobrium.
On March 30, the bet paid off: A federal judge agreed that the December 2014 decision by U.S. regulators was flawed, freeing MetLife from potentially higher capital requirements and other restrictions. In her opinion, unsealed Thursday, the judge took regulators to task for what she called an “unreasonable” decision to ignore the cost of stricter supervision of the firm. The administration said it would appeal the ruling in the coming weeks.
“He has been vindicated,’’ said Morgan Stanley President Colm Kelleher, a friend of Mr. Kandarian’s who also has a business relationship with MetLife. “Many people thought it was a losing battle.”
Mr. Kandarian declined to be interviewed for this article.
The MetLife CEO seems an unlikely foe for Uncle Sam. A former government official who ran the U.S. agency that insures private pensions, he is quieter than his extroverted predecessors at MetLife who were known for breaking into song at company events and speaking to employees at town-hall-style settings. He joined in 2005 as the insurer’s chief investment officer.
Judge Rosemary Collyer’s Opinion
Judge’s Rejection of MetLife’s ‘Systemically Important’ Label Is Appealed (April 8)
Judge Ripped Regulators’ Metlife Call as ‘Unreasonable’ (April 8)
MetLife Tried to Shed Fed Oversight in 2008 (April 8)
MetLife Decision Could Pose Threat to Global Regulatory Efforts (April 5)
IMF Warns of Rising ‘Systemic Risk’ From Insurers (April 4)
Fed Pulls Overseers From MetLife in Wake of Ruling (March 31)
MetLife Wins Bid to Shed ‘Systemically Important’ Label (March 30)
Not long after becoming CEO in 2011, Mr. Kandarian, himself educated as a lawyer, began preparing for a legal challenge, according to people familiar with the events. He ultimately won over internal skeptics by promising to avoid the bombastic language of all-out war.
MetLife’s adversary was the Financial Stability Oversight Council, a group of top financial regulators with the authority to identify “systemically important financial institutions,” or SIFIs, that could threaten the U.S. economy should they fail in another crisis.
General Electric Co. is dismantling its giant finance business, GE Capital, after it was designated a SIFI, in part because the regulations hurt its returns. American International Group Inc., too, has come under pressure from investors to break up to escape the extra regulatory burden. MetLife itself has outlined plans to shed a chunk of its U.S. life-insurance business for what it said were strategic as well as regulatory reasons.
Mr. Kandarian’s major concern was that the Federal Reserve would require unusually thick capital cushions, forcing MetLife to raise prices or quit lines of business. He said publicly that such onerous oversight would put the company at a competitive disadvantage to rivals.
His view was that MetLife was swept up in “the overreaction and overzealousness of regulators to prove they were doing something” to prevent future financial crises, said one person familiar with the situation.
The first step toward an eventual lawsuit came in November 2012, when Mr. Kandarian reached out to a lawyer who is highly respected for challenging federal agencies: Eugene Scalia, son of late Supreme Court Justice Antonin Scalia and a partner at Gibson, Dunn & Crutcher LLP.
It was still months before MetLife officially would come under consideration as a SIFI, but Mr. Kandarian wanted help if MetLife decided to turn to the courts.
“I was impressed that he was seeing around the corner…in a legally sophisticated way,” Mr. Scalia said.
Mr. Kandarian at this point already was frustrated with federal regulators. In early 2012, an Internet bank owned by MetLife had flunked a Federal Reserve “stress test” designed to gauge its ability to absorb losses in another financial downturn. That test result quashed MetLife’s plans to buy back shares and raise its dividend.
MetLife was the only life insurer tested, and Mr. Kandarian complained publicly that the Fed’s “bank centric” test didn’t reflect important distinctions between life insurers and banks, which the Fed had historically regulated. Mr. Kandarian also suggested that the Fed’s math was wrong, a comment criticized by some investors and analysts.
The experience “left a bad taste in [MetLife’s] mouth,” said Ryan Krueger, a stock analyst with Keefe, Bruyette & Woods.
Mr. Kandarian, trained as a lawyer, learned a public-relations lesson from the stress-test failure and took his views about regulators behind closed doors. He began discussing the prospect of tighter U.S. scrutiny during nearly every private board meeting, people familiar with the situation said.
When MetLife directors asked whether a lawsuit would harm the company’s reputation, alienate customers or antagonize regulators, Mr. Kandarian promised a measured approach. During one board discussion in October 2014, he said MetLife “was not declaring war against the government,” said one person familiar with the conversation.
“Steve kept saying repeatedly, ‘If we believe that the decision is wrong as a matter of law, then it was important that we as a company take advantage of our rights to due process and correct what we believe is an irrational decision, as long as we did it in a respectful way,’” said William Kennard, a MetLife independent director and former Federal Communications Commission chairman.
When directors convened again that December, a month before filing the lawsuit, Mr. Kandarian’s deputies “wanted to be sure we would be comfortable,” a person familiar with the matter said. Their plan to publicize MetLife’s legal challenge was “very analytical, void of hyperbole or malice” and designed “not to come back to haunt the reputation of the business.”
Mr. Kandarian made it clear at that meeting he thought the company had a solid case. “We are even more convinced that we should proceed,” he said at the December 2014 meeting, according to another person familiar with the situation.
When a federal judge handed Mr. Kandarian the legal victory he predicted, he was on the phone with Mr. Kennard. “Wow, the decision just came out, and it looks like we just won,’” he said, according to Mr. Kennard.
Mr. Kandarian then emailed all board members about an hour later with a muted celebration: “We were successful.”
—Emily Glazer contributed to this article.
MetLife Inc. beat back a U.S. attempt to label it too big to fail, which would’ve put America’s biggest life insurer under tougher government scrutiny and could have forced it to put more money in reserves.
A federal judge in Washington struck down the designation on Wednesday in a decision that could shake up the financial regulatory reform implemented following the 2008 recession. The ruling might give ammunition to Republican lawmakers who’ve argued that regulators have abused their authority under the Dodd-Frank Act.
“One of the centerpieces of the Dodd-Frank Act has been called into question,” Isaac Boltansky, an analyst with Compass Point Research & Trading in Washington, said in a phone interview. “Depending on what the court’s reasoning was, I think it’s fair to believe that there could be a more aggressive push to curtail the FSOC’s authority in the next Congress depending on the election outcome in November.”
U.S. District Judge Rosemary Collyer rejected the Financial Stability Oversight Council’s rationale for classifying MetLife as a systemically important financial institution. The reasons for the ruling were sealed by the judge, although she did offer a glimpse of her rationale, siding with MetLife that the designation didn’t take into account the economic effect on the insurer.
The ruling undercuts the foundation of the Obama administration’s plan to more heavily regulate four non-bank businesses that were determined to have the potential to destabilize the American financial system. MetLife had called the designation arbitrary and unjustified. Chief Executive Officer Steve Kandarian said earlier this year that his New York-based company will shed much of its domestic retail business because SIFI put it at a “significant competitive disadvantage.”
“Most in the market would have had MET not prevailing in this case. This should probably send the stock ripping,” David Havens, a debt analyst at Imperial Capital, wrote in a note. “As for the bonds, the story is more neutral, to actually marginally negative. An extra layer of capital blubber and oversight has appeal to credit investors.”
MetLife jumped 5 percent to $44.58 at 1:38 p.m. in New York trading. Prudential Financial Inc., which is the second-largest U.S. life insurer and was also named a non-bank SIFI, advanced 1.6 percent to $72.61.
The ruling validates MetLife’s decision to fight the SIFI designation, Kandarian said in a statement Wednesday.
“From the beginning, MetLife has said that its business model does not pose a threat to the financial stability of the United States,” Kandarian said. “This decision is a win for MetLife’s customers, employees and shareholders.”
The government disagreed.
After a rigorous analysis, the FSOC “determined that material financial distress at MetLife could pose a threat to the financial system,” U.S. Treasury spokesman Adam Hodge, said in an e-mailed statement. “We firmly believe that FSOC acted well within its legal authority to protect the entire global economy.”
Prudential spokesman Scot Hoffman declined to comment. American International Group Inc. spokesman Jon Diat also declined to comment.
A public version of the judge’s reasons should be available after April 6. That was the deadline Collyer gave lawyers to submit any proposals on keeping parts of the opinion sealed or any redactions they wanted.
Collyer’s two-page order rescinded the FSOC’s determination and said a judgment was to be entered in favor of MetLife.
The insurer’s lawyers argued that the council failed to assess MetLife’s vulnerabilities to financial distress and that it failed to consider the economic effects of the designation on the company. The judge ruled in MetLife’s favor on those points.
Filed last year, the MetLife suit was the biggest challenge yet to the council that includes Federal Reserve Chair Janet Yellen and Treasury Secretary Jacob Lew. Other non-banks bearing its SIFI designation are AIG and Prudential, neither of which have brought challenges. General Electric Co. has agreed to sell more than $160 billion of assets since April under a plan to shed the bulk of its GE Capital finance operations. GE has said it intends to submit an application to regulators this quarter to drop the label.
The details in the judge’s opinion will be important to determine the wider impact of the ruling, said Deepak Gupta, a lawyer for a group of insurance regulation scholars who backed the FSOC.
“I understand the market has already responded” but “it could be a very narrow decision,” Gupta said. “This could be a minor setback or a really serious blow to the Dodd-Frank Act’s systemic reform and we just don’t know.”
At a February hearing, Collyer sharply questioned Justice Department attorney Eric Beckenhauer, asking why the council said it would conduct a “vulnerability analysis” of MetLife before making its determination, then failed to do so.
She also asked the government’s lawyer why FSOC assumed that MetLife would be at the brink of collapse. in the event of a fiscal crisis.
“That’s not risk analysis,” she said. “That’s assuming the worst of the worst of the worst.”
Beckenhauer said it’s the nature of such crises to be unanticipated. MetLife is asking her to override the “considered judgment” of the heads of nine major financial regulators, he said.
The government lawyer also said the council was acting upon its congressionally granted authority to assess which nonbank financial companies pose a possible risk to the broader economy. He focused on MetLife’s ties to other firms around the world — its interconnectedness — a factor that was crucial in the 2008 financial crisis.
MetLife’s lawyer Eugene Scalia, son of the late Supreme Court Justice Antonin Scalia, has filed several lawsuits seeking to overturn Dodd-Frank regulations. He said the designation process was “clouded in mystery.”
In January, Kandarian announced MetLife plans to pursue a spinoff, sale or public offering of much of its U.S. retail business, which sells variable annuities and life insurance policies and could be subjected to higher capital rules although they’ve not yet been finalized.
While the insurer hasn’t outlined a precise plan, it struck a deal in February to sell a distribution network with 4,000 financial advisers to Massachusetts Mutual Life Insurance Co.
The case is MetLife Inc. v. Financial Stability Oversight Council, 15-cv-00045, U.S. District Court, District of Columbia (Washington).
The giant insurer MetLife said on Tuesday that it was exploring spinning off its retail life and annuity business in the United States because of financial pressures it is facing under regulations put in place in the wake of the financial crisis.
The decision was made two years after the Financial Stability Oversight Council, a group created by the 2010 Dodd-Frank regulatory legislation, named MetLife a systemically important nonbank financial institution, or SiFi. That designation carries requirements to set aside more capital as a cushion against a substantial decline in the nation’s financial markets as occurred in 2008, potentially limiting its earnings.
MetLife is considering several options, including an initial public offering to create a company that would, presumably, be better able to compete with smaller life insurance and annuity providers who are not subject to the same regulatory restrictions.
MetLife is the largest life insurance company in the United States, with $880 billion in assets, including $240 billion of retail assets that would be part of the new company.
American International Group, Prudential Financial and General Electric Capital Corporation, the financing arm of General Electric, have also received the designation, which was largely bestowed on companies deemed so large that their failure would damage the American economy.
In a statement on Tuesday, Steven A. Kandarian, MetLife’s chairman, president and chief executive, said the risk of increased capital requirements contributed to the decision to explore breaking up the business, although exact plans have not been completed.
“An independent company would benefit from greater focus, more flexibility in products and operations, and a reduced capital and compliance burden,” he said.
(Corrects Representative Garrett’s first name to Scott in paragraph 6, clarifies in paragraph 3 that Lew testified earlier this year and not Lew and Yellen)
Dec 8 Republican lawmakers on Tuesday lashed out at a major council of U.S. regulators charged with responding to threats to the financial system, saying the Financial Stability Oversight Council is secretive and unwilling to share information.
Financial Services Committee Chairman Jeb Hensarling, of Texas, depicted the council, which includes the heads of the Securities and Exchange Commission and Federal Deposit Insurance Commission, as “powerful government administrators, secretive government meetings, arbitrary rules, and unchecked power to punish or reward.”
This was the first time that as many as eight of the 10 voting members of the council testified before the House of Representatives committee. Federal Reserve Chair Janet Yellen was absent along with Treasury Secretary Jack Lew, who testified earlier this year.
Council members told the hearing they could not share much of the information used to monitor banks and financial companies because it is considered “non-public” or confidential.
Wisconsin Republican Sean Duffy pressed the council, created by the 2010 Dodd-Frank financial reform law, for analysis, memos and correspondence that led it to designate MetLife Inc, General Electric Co and American International Group as systemically important financial institutions, known as “too big to fail.”
“You need to become more like us – more transparent, more open to the American public,” New Jersey Republican Scott Garrett said.
MetLife has sued the council for designating it a “non-bank systemically important financial institution” last year, requiring it to hold more capital.
Last year, the non-partisan Government Accountability Office said the council needed to shed more light on its process to determine if a company is systemically important. (Reporting by Lisa Lambert; Editing by Richard Chang)
Read more at Reutershttp://www.reuters.com/article/congress-finance-idUSL1N13X25720151209#GojDCjDZ8jbhY3dM.99
Republicans aired long-running gripes to regulators Tuesday about a panel created to monitor the most powerful forces in financial markets.
The Financial Stability Oversight Council was created to gather top financial regulators from across the federal government in one place to discuss broad risks to the financial system.
But Republicans heaped scorn on the group as too powerful and excessively opaque at a hearing Tuesday, as the GOP pushes legislation to limit its ability to impose tougher rules on large financial institutions.
The House Financial Services Committee heard testimony from eight members of the 10-person panel, including the heads of major regulators like the Securities and Exchange Commission, Commodity Futures Trading Commission and Federal Deposit Insurance Corporation.
The panel has pushed legislation in the past that would alter the FSOC’s operations, making more of its operations transparent and placing additional limits on its powers. And that message continued Tuesday, as Republicans heaped criticism on the panel’s efforts.
Chairman Jeb Hensarling (R-Texas) opened the hearing by calling the FSOC one of the most powerful and least accountable agencies in the federal government, and said reform of the panel is “paramount.”
“FSOC typifies not only the shadow regulatory system but also the unfair Washington system that Americans have come to fear and loathe,” he said.
Republicans have pushed several bills that would alter FSOC operations. One of the most significant would raise the threshold for what constitutes a “systemically significant” firm bearing stricter oversight.
Currently, the FSOC automatically grants such a status to institutions with over $50 billion in assets, but GOP legislation in the Senate would raise that to $500 billion.
Such efforts have faced significant Democratic opposition, and the White House has been consistent in opposing efforts to rework portions of Dodd-Frank, one of its landmark legislative achievements.
Tuesday’s hearing followed a path similar to many hearings regarding significant portions of that 2010 law, as Republicans highlighted their critiques with the overhaul and Democrats sought to defend it.
Rep. Maxine Waters (D-Calif.) the top Democrat on the panel, accused her GOP colleagues of a “convenient case of amnesia” on the topic, arguing that the financial crisis proved the need for specific oversight of systemically important institutions.
While several top regulators testified at Tuesday’s hearing, two of the panel’s biggest names — Treasury Secretary Jack Lew and Federal Reserve Chairwoman Janet Yellen — did not testify.