Back in February 2015, the pension risk transfer by Verizon of the assets of tens of thousands of former Bell Atlantic employees to Prudential grabbed a significant amount of retirement plan industry attention.
This was not just because the risk transfer deal at the time represented one of the largest-to-date group annuity transactions ever negotiated, nor because it was suggested (rightly) by many to be a bellwether of a very significant pension de-risking trend taking shape in corporate America. The risk transfer deal was challenged forcefully in the district and appellate courts, leading to a series of important decisions that have helped to shape the way employers think about transferring their pension assets and liabilities to insurers.
Eventually the matter reached the 5th U.S. Circuit Court of Appeals, resulting in a decision by that court to toss pensioners’ effort to halt the risk transfer. In a phrase, the appellate court ruled that the decisions to amend the plan and transfer certain assets to an annuity contract were settlor, not fiduciary, functions. Thus, Verizon was more or less freed to pursue the sizable risk transfer on the terms it had negotiated in good faith with Prudential.
The main worry of the retirees, as Jack Cohen, Association of BellTel Retirees chairman, told PLANSPONSOR at the time, was that their billions of dollars in income annuities would be less well-protected than they would be if they remained Employee Retirement Income Security Act (ERISA)-covered benefits, for example in the case of a personal bankruptcy or the admittedly unlikely bankruptcy of Prudential. The plaintiffs further claimed they received insufficient notice in advance of the transfer of their promised pension benefits from Verizon’s to Prudential’s balance sheet and that no such right to enact a transfer was established by plan documents. Again, these arguments ultimately fell short, per the difference between fiduciary and settlor functions.
Today the BellTel Retirees are several years down the road of the pension risk transfer, and according to a new conversation with Cohen, who continues in the role of chairman for the Association of BellTel Retirees, the group’s retirement income has not been disrupted in any significant way. Cohen even freely admits that Prudential has so-far effectively served his fellow retirees well, all things considered.
“But that was not by any means the whole point we were trying to make with our challenge, and not every insurer is a Prudential,” Cohen says. “As we predicted and forewarned, we have seen, since Verizon became an early mover, so many other companies that have gone down the road of risk transfers. The horse has left the barn and this represents, in our opinion, the final unfortunate act for the once-great U.S. private pension system.”
On his reading, the Pension Benefit Guaranty Corporation (PBGC), which insures corporate and union pensions in the U.S., has admitted this much in its most recent reporting. Pointing specifically to the 2017 Annual Report of the Participant and Plan Sponsor Advocate, for example, Cohen says he is galled by the recent increase in concern about risk transfers—arguing that his association and others have been warning the agency for a long time that an increase in the popularity of pension risk transfers, now colloquially known as “PRTs,” would eventually lead to severe harm to the PBGC insurance system.
“Back when our plan at Verizon was risk transferred, they told us that they would only lose less than $2 million in annual premiums, and so it was not even a reportable event from their perspective,” Cohen says. “Now all of a sudden in 2018 they are starting to pay attention to the very dire warnings we were giving back then. Unfortunately they did not take action when they still could have done something about it.”
Cohen suggests it is “something of an insult to the BellTel Retirees to see the PBGC’s emerging stance here.” He notes that, new to the 2017 Advocate Report, is an appendix that includes a full pension de-risking study “commissioned by the Office of the Advocate at the request of plan sponsors.” The study focuses on PBGC and Congressional actions that may slow pension de-risking activity, and highlights the drivers and causes of de-risking, about which Cohen has long been sounding the alarm.
“The study found that reducing PBGC single-employer premium levels or stemming their rapid growth is likely to decrease risk transfer activity,” Cohen notes. “This is the same warning we have been giving for a long time now. Back when we were still held within the Verizon plan the premium charged by the PBGC was $42 per participant. That was already too high, but the flat-rate premium for PBGC insurance coverage of a pension funding shortfall has gone up significantly since then. The annual fixed-rate in 2019 will rise to $80 per participant, while the variable rate will rise to 4.1% on unfunded vested benefits.”
For its part, the PBGC says simply that these rate hikes are undesired but necessary to cover the costs of insuring the many millions of beneficiaries of a pension system that holds such significant and shifting risks. Cohen says he has some sympathy here, but he also says the fact that premium hikes are still occurring is an indication that PBGC “perhaps does not truly intend to try to slow or halt the pace of risk transfers.” And anyway it would most likely require a concerted action by Congress to solve these issues.
“It’s really an unfortunate picture, but we also have to be realistic and keep working hard,” Cohen concludes. “I know that de-risking is a phenomenon whose time has come. But this does not mean we should stop asking questions and stop working to make risk transfers the best we can for retirees. We have to wonder if the insurance companies can stand to take all that risk, and how they will manage it. What we are concerned with is trying to recoup at least some of the protections that we had under ERISA. We are not looking for pie in the sky—we’re looking for Congress and the state legislatures to recognize this could become an economic disaster if we do not protect peoples’ pensions.”