Why Some Pensioners Worry About Risk Transfers

A case heard in federal appeals court this week asks whether increasingly common pension risk transfer moves by large corporate plan sponsors are putting retirees at increased risk.

A three-judge U.S. court of appeals panel heard oral arguments February 4 in the class action Lee v. Verizon (Case No.  14-10553), a case regarding the transfer of 41,000 Verizon retirees’ pension accounts into a single group annuity sponsored by Prudential Insurance Company.

The pension risk transfer move has already been approved by a district court, based in part on the plaintiffs’ inability to prove real harm occurred as the result of the risk transfer. An earlier opinion issued by Chief Judge Sidney A. Fitzwater of the U.S. District Court for the Northern District of Texas, Dallas Division, cited multiple reasons for the dismissal including the plaintiffs’ failure to prove that Sections 102(b), 404(a) and 510, as well as Section 409(a), of the Employee Retirement Income Security Act (ERISA) were violated. At the time, Fitzwater stated that while he was dismissing the case, his opinion did not prohibit the plaintiffs from repleading their case in the future, leading to the current appeal.

The main worry of retirees is that their billions of dollars in income annuities won’t be as well protected as ERISA-covered benefits, for example in the case of a personal bankruptcy or the admittedly unlikely bankruptcy of Prudential. The plaintiffs further claim 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.

In a conversation with PLANSPONSOR, Jack Cohen, Associate of BellTel Retirees Chairman, outlined the plaintiffs’ other concerns, noting that his organization advocates for Verizon retirees and that he personally stands among the large class of complainants. While the pension risk transfer has so far been deemed legal, he suggests Verizon did not follow some of the best practices commonly enacted during a major pension risk transfer operation, leading to unnecessary stress and resentment among the retiree base.

“If you look at pension risk transfer deals enacted by General Motors and Ford, for example, they included lump-sum offerings and plenty of advanced warnings and explanation of the transfer,” Cohen says. “We feel we were not given sufficient notice or other options, apart from accepting the annuity.”

Additionally, Cohen says the transfer was “highly discriminatory,” in that it only applied to some similarly situated Verizon retirees and not others. While he admits that the lawsuit’s claims are in direct opposition to established industry practices and the opinions of numerous benefits professionals and insurance firms, which view pension risk transfer deals as a the next logical step in a challenging history for once-dominant pension plans, he feels the courts are allowing certain plan sponsors to undermine the letter and intent of ERISA. 

Cohen notes the lawsuit is not about getting a smaller pension check under the terms of the risk transfer, or even about a lack of confidence in Prudential’s commitment or ability to pay the large class of Verizon pensioners.

“No one is arguing about the present solvency condition of Prudential, but because of this transfer, retirees are not safeguarded under the same protections as prior to the transaction,” he says. “Although the retirees are still receiving the same monthly payments, this pension-stripping transaction replaces their pensions with non-ERISA protected insurance annuities. It strips retirees of ERISA’s protections and the Pension Benefit Guaranty Corporation’s [PBGC] uniform guarantee, putting their retirement income stream at risk in the event of a personal bankruptcy.”

Cohen says the case also raises two other issues that have not received much attention in the courts or the financial press: “We do not feel there is anything being done to address the potential for resale of these pension obligations further down the road. Nor do we feel there is a reason to trust the insurance companies, well established or not, to know when they have reached capacity and should stop taking on more pension obligations.”

As Cohen observes, part of the industry’s argument for why pension risk transfers are an acceptable path forward for ERISA-covered pensions is that the insurance firms taking on the pension risk are very healthy and are good at what they do. (See "Evaluating Participant Benefit Security in Pension Buyouts.")

“They really make hay on the fact that they’re so strong and solvent,” Cohen says. “But what protections are in place when it comes to the prospect of someone like Prudential later deciding this is not a business line they want to be in? Will they be able to resell the assets, as it were? Who will be lining up to buy the assets when Prudential wants to get out of the business? We don’t want to see pension liabilities becoming a marketable security in any way.”

Contacted for comment about this story, Prudential says it is not able to share more detail about its deal with Verizon, and the company declined to respond to Cohen’s suggestions about the long-term potential for the secondary or tertiary transfer of pension obligations. In any case, the recently announced $600 million risk transfer the firm entered into with another pension plan sponsor suggests it has no plans to slow down in the space.

“The suggestion that we can move these assets out from under ERISA and expect them to be fully protected is a myth whose time has come,” Cohen says. “The insurance companies involved with this de-risking see so much opportunity they don’t know where to go first. It’s our obligation as a nation to make sure that, if this is what the evolution of pensions is going to look like, that it happens without giving up all these protections we have worked so hard to establish in ERISA and other laws.”

Given the previous setbacks in the federal court system, Cohen says it would be foolhardy to predict a positive outcome for the current appeal, though he says he remains upbeat about the process.  

“We have to remain optimistic, but you’re right, it’s very hard to predict what the justices will say and whether they would be willing to overturn the lower court verdict and a common business practice,” Cohen says.

Because of this, Cohen says the Association of BellTel Retirees is attacking its problems from two directions: “Beyond our involvement in this litigation, we’re also directing significant resources and attention to a legislative approach to solving the challenges presented by pension risk transfers.”

So far this effort has been conducted in partnership with another lobbying/advocacy organization, Protect Seniors. As Cohen explains, the two organizations have been working with state legislatures across the U.S. to shore up a patchwork of state-level protections for annuity holders.

“From the legislative point of view, insurance companies are regulated within each state,” Cohen explains. “Each state has a guarantee association that would in theory step in to pay the benefits, but these may or may not be fully funded themselves, and they may or may not have the obligation to cover the default of a given insurer. Some state associations only cover $100,000 worth of a pension benefit, while others range up to $500,000.”

Cohen says his group and Protect Seniors have helped push down the number of states only covering $100,000 or less in annuity guarantees down from nine to two in recent years. He says this is a major improvement in protections for people living in these states and depending on an annuity for monthly income. But even with some success in the states, Cohen warns that Washington must get involved as well.

“It’s no secret that we were on the phone with some people from PBGC last year trying to state our case and get their support,” Cohen says. “We really got the impression that they couldn’t care less.”

This could be changing, though, as the PBGC recently announced it has revised the 2015 premium filing procedures and instructions to require after-the-fact reporting of certain defined benefit plan risk transfers through lump-sum windows and annuity purchases.

Cohen says this could be a positive move, but he is discouraged by the fact that the agency explains the new collection procedures as an effort to assess how risk transfers can substantially reduce the premiums plans otherwise would pay to the PBGC—not an effort to better protect pension beneficiaries.

“In fact, the PBGC has really only acted to deepen the problem, in that they have raised their premium rates again for this year and have announced more hikes for 2016,” Cohen warns. “This is making it more and more difficult for employers to afford the premiums, and this is at the same time that longer mortality assumptions are coming into place. What’s going to be the direct result of this increase? It’s going to mean more attractive buyout propositions and more buyouts. It’s that simple.”