PATH Act Enacted – Health, Retirement, and Fringe Benefit Plans Affected
On December 18, the President signed H.R. 2029, which included an omnibus appropriations bill and the Protecting Americans from Tax Hikes Act of 2015 (“PATH Act”). The legislation impacts a number of health, retirement, and fringe benefit plans.
Noteworthy elements of the legislation relating to employee benefits include:
- “Cadillac Tax” – The excise tax assessed on high cost employer-sponsored health coverage has been delayed until 2020.
- Mass Transit and Parking Benefits – These benefits have been permanently extended. The benefits are excluded from an employee’s wages for payroll tax purposes and from gross income for income tax purposes.
Broader tax reform legislation in 2016 is seen as unlikely, though it is considered a key campaign topic for presidential candidates.
Basel Committee Revisions to the Standardized Approach for Credit Risk
On December 10, the Basel Committee on Banking Supervision (BCBS) released a second consultative document proposing revisions to assigning risk weights under the Standardized Approach for credit risk. As we reported in our January 2015 LRA Update, the first consultative paper outlined alternative methodologies that would have replaced the use of external credit ratings for all types of exposures. In response to feedback suggesting that the complete removal of references to ratings was unnecessary and undesirable, the BCBS has reintroduced the use of ratings, in a non-mechanistic manner, for bank and corporate exposures. The revised proposal also includes alternative approaches for jurisdictions (such as the U.S.) that do not allow the use of external ratings for regulatory purposes.
In order to discourage mechanistic reliance on external credit ratings, the revised consultative document suggests adding Pillar 1 due diligence requirements for assessing the creditworthiness of a bank’s counterparties. If a bank’s due diligence assessment reflects higher risk characteristics than those implied by the external rating, the bank would apply a higher risk weight to the exposure. Due diligence assessments may not be used to justify a lower risk weight than that determined by the external rating.
For banks in jurisdictions that do not allow the use of external ratings, “investment grade” corporate exposures would be assigned a 75% risk weight; all other corporate exposures would be assigned a 100% risk weight (unless the exposure is in default). Note that a different methodology is described for exposures to banks.
The document is open for public comment until March 11, 2016.
It is worth mentioning that U.S. banking regulators also issued a press release on December 10, noting that the proposed revisions would apply primarily to large, internally active banking organizations, and that any changes to U.S. rules would be conducted in a manner consistent with U.S. notice and comment processes.
Life Insurance in the News – Retail Universal Life Rate Increases
On December 4, the Wall Street Journal published an article discussing recent trends among major retail universal life insurers to increase rates on seasoned, inforce policies. The article identifies AXA, Voya, Transamerica, and the U.K.’s Legal & General Group as companies that have publicly announced such rate increases. The article speculates that insurers are under pressure to improve results due to the impact that the prolonged low interest rate environment has had on their investment income. Other carriers are expected to follow suit.
While this development relates to the retail universal life insurance market, it is consistent with recent actions that have been observed in the institutional market. In December 2013, Transamerica Life notified its BOLI policyowners that “Due to the persistently low interest rate environment, cost of insurance rates on general account policies…will increase.” In most instances, the rates were increased to the contractual maximum guaranteed rates.
Other GA BOLI carriers have acknowledged that the recent interest rate environment has resulted in profit margins being below long-term expectations.