Pension funds and insurance companies share a little discussed attribute, one which I have mentioned from time to time on this blog: they are both great drivers of capital formation. One of the unique aspects of capital formation through these entities is the function of time: it takes time, to quote the bankers from the movie Mary Poppins in the infamous "Fidleity Fiduciary Bank" scene, to “build railways through Africa” (or even California, for that matter). Pension funds and insurance general accounts are of a nature uniquely suited to such investment, the commitment to which often may span decades.
Which really brings us to an obscure problem the DOL has struggled with in the past under ERISA’s plan asset rules (in attempting to define a “transition guaranteed benefit policy”), and now is an issue which may well come to the forefront because of the termination rules under Reg. 1.408b-2(c)(3). 1.408b-2(c)(3) states that a contract will not be considered reasonable if it does not permit termination “on reasonably short notice under the circumstances“ of the contract by the plan without penalty to the plan. Fortunately, the DOL noted that this should not be read to prevent long term contracts, nor contracts which “reasonably compensates the service provider” for their loss upon early termination of the contract. This exception will not apply if that recoupment is “in excess of actual loss or if it fails to require mitigation of damages.”