By Lauren Bailey
The past year saw more lawsuits
filed against plan sponsors that have executed large pension risk
transfers (PRTs), but there are steps employers can take to mitigate the risk of
losing such a lawsuit if one is brought, said Robin Diamonte, chief investment
officer of RTX, formerly Raytheon Technologies Corp.
Many of the lawsuits take aim
at PRTs to Athene Holding Ltd. and its subsidiaries, two of which have since rendered
dueling judgements. Insiders say robust pension plans with billions of dollars can be low hanging fruit for law firms and tempting to target. And many of the lawsuits brought forth involving Athene tried to make the case that it was a risky company for transfers, since it was fairly new to the PRT space.
Last March, for example, AT&T Inc. and its independent fiduciary,
State Street Global Advisors Trust Co. were sued by former participants after
conducting a roughly $8B PRT in 2023 that transferred 96,000 plan participants
to Athene. In the filing, the plaintiffs alleged that the PRT put “retirees'” futures in the hands of a risky new insurance company that is dependent on its
Bermuda-based subsidiary and which has an asset base far riskier than
AT&T’s.”
Three additional former participants of AT&T’s pension benefit
plan then filed a separate complaint against the telecommunications company and
State Street, also accusing the companies of violating their responsibilities under
the Employee Retirement Income Security Act to obtain the “safest annuity available.”
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In addition, in a lawsuit filed in April 2024, four retiree
members of Pittsburgh-based Alcoa USA Corp. alleged that the organization
violated its duties under ERISA. In the
filing, the plaintiffs alleged that, as a result of PRTs to by their employer to
Athene between 2018 and 2022, they “lost their status as ‘participants’ in the
ERISA-governed plans, and, therefore, are no longer subject to ERISA’s
protections for employee retirement benefits.”
The lawsuit also alleged that the organization selected “a
substantially riskier insurer than numerous other traditional annuity
providers.” The case was later dismissed for lack of standing, with the
judge noting the plaintiffs failed to demonstrate actual harm as a result of
the pension buyout transaction.
However, a separate lawsuit filed by four former pension
plan members against Lockheed Martin Corp. for PRTs it offloaded to Athene in both
2021 and 2022 was allowed to proceed. In the filing, the plaintiffs alleged the
organization neglected to choose the “safest possible annuity” and that, the
organization’s transfer “put its employees’ future retirement benefits at
substantial risk of default — a risk for which they were not compensated and
which devalued their pensions.” The judge in this case found the plaintiffs met
the threshold in demonstrating “very real possibility” of imminent harm to
retirees.
In the past, there have been cases where PRT lawsuits have
been dismissed; however, in cases where they’ve gone past the motion to
dismiss, it’s a loss for many plan sponsors — even if they end up winning the
case in the end, said Dennis Simmons, executive director for the Committee on Investment of Employee Benefit Assets.
“They have to go into the really expensive process of
discovery, and . . . I think in a lot of cases, plaintiffs are just looking to
get past the motion to dismiss to . . .
a settlement. It’s a concern overall and has been for years.”
Administrative details matter
While there is guidance from the Department of Labor on
picking an insurance provider, it’s a little bit vague in the sense that it
doesn’t define what exactly is the “safest available annuity,” said Diamonte,
noting there are things plan sponsors can do to ensure they perform and
document good fiduciary due diligence.
In 2018, Raytheon implemented its own PRT, transferring
nearly $1B in pension benefit obligations for 13,000 U.S. retirees and their
beneficiaries through a group annuity contract with the Prudential Insurance
Co. of America, a subsidiary of Prudential Financial Inc.
Typically, in these transactions a settlor committee is
created to take a hard look at transaction timing and scope, as well as a fiduciary committee that
is created to ensure the insurance company is stable, safe, of the highest
quality and has the capabilities to perform all the administrative duties that
would be expected of them, said Diamonte.
“More and more plan sponsors are realizing that it’s
important, because of litigation reasons, to hire an independent fiduciary to
try to help curb the [potential] for litigation,” she noted. “You have to
really be careful as a fiduciary to make sure that you are documenting the
insurer selection process and that you’re really looking out for the best interests of your
participants, and [you] understand state guarantees versus the federal [Pension
Benefit Guaranty Corp.] guarantees.”
Recent pension risk transfer litigation reinforces just how
critical it is for employers to do the required due diligence when implementing
these solutions, said Megan Nichols, a senior partner and head of
pension settlement solutions at Aon.
She said it’s critical plan sponsors have the documentation
to demonstrate every step they’ve taken to ensure plan members are protected
and that they’ve fulfilled their responsibilities under ERISA, including what
aspects of the new insurer they examined, the conclusions drawn and why.
Nichols noted that one of the biggest risks for employers in
these transactions is overlooking the communications process. In a full plan
windup, there are clear regulatory requirements on the cadence of
communications and information to be sent to plan participants. In a PRT
process, plan sponsors have a little more discretion. Similar to the
communications process behind full plan windups, the PRT process typically
begins with notifying participants of the change and any relevant information
that needs to be provided.
Providing reassurance
When implementing the PRT process, it can be helpful to
reassure plan members that the PRT mechanism is a de-risking tool and that very
few companies profit from the transaction, said Diamonte.
She also pointed out that, in most cases, pension plans can
become a large liability that isn’t a part of an organization’s core business,
so it’s beneficial for both the plan sponsor and members to have it transferred
to an insurance company for which liabilities is its focus and core
business.
“The more that a participant understands that the
company is not trying to profit off of this, I think the more they’ll feel
better about the transaction. . . . If you talk to an insurance company,
they’ll tell you that the pension liability actually hedges life insurance liability. In many cases, insurance companies have been managing liabilities for years and are well equipped to take on these liabilities.”
Employees usually just want to know the new company paying their
benefits is credible and has the resources to do their job, she said. “In some cases,
insurance companies are a lot more diversified than individual corporations.”
As well, it’s important to send communications at the point
of transitioning people to the insurance company to just give participants that
background and to ensure that they feel comfortable with what’s happening, said
Nichols.
“It’s really critical that [plan sponsors] understand
the insurance company’s administrative capabilities. If you’ve got a population
that’s used to going to a specific call center or how they interact with the
employer itself, that’s all going to move to the selected insurance company.
So, you want to be confident that you’re sending your participants to an
organization that’s going to uphold the same standards that you have at your
own organization. And I think if those things are done right, it can hopefully
feel very smooth and seamless for the plan participants.”
Diamonte said for its PRT, Raytheon did a deep dive into the
administrative services capabilities, in addition to focusing on premium and risk
control. She suggests plan sponsors visit the insurers’ call centers to see their
service levels, how they’re handling calls and wait times and whether they’re deploying
satisfaction surveys.
Far-reaching consequences
Simmons believes the recent pension risk transfer lawsuits are part of another litigation trend that could further
deter some U.S. employers from sponsoring employee retirement plans.
He noted that, in cases in which losses are speculative,
plaintiffs should be held to a reasonably high bar because these judicial
opinions will have ramifications for the defined benefit pension plan sector.
“Our concern is that when courts are not at least
forcing plaintiffs to come with some legitimate claim, it really is a difficult
spot for plan fiduciaries who are voluntarily offering these plans to begin
with,” he said. “These are voluntary benefits that plans offer and so
to have frivolous litigation is . . . a major issue for the retirement savings
system overall.”
Indeed, Bob Hunkeler said as much in an exit interview to Markets Group in 2023, upon his retirement from the International Paper Co. At
the time of his interview, he noted the Memphis, Tenn-based pulp and paper
manufacturer was caught up in the initial set of companies that
experienced the first 401k lawsuits after transferring roughly $1.3B in pension
liabilities for 45,000 retirees and their beneficiaries to Prudential Insurance
Co. of America in Oct. 2017.
The class-action lawsuit took six years to resolve in the
courts, resulting in a $30M settlement. Hunkeler noted that increased PRT
litigation was one far-reaching negative outcome from the case. He also pointed
out that many plan members move their retirement savings to external financial
institutions after retiring from the company, which is another reason why some
employers have had to use PRTs to de-risk. He noted that the lawsuits
subsequently led to a decline in employer-sponsored defined benefit pension
plans.
CIEBA has submitted friend-of-the-court amicus briefs to
chime in on PRT cases in the hopes of underscoring just how important this
issue is for the retirement savings systems.
