Verizon Retirees Sue to Block Pension-Risk Transfer

(November 30, 2012) – Just days before the second largest pension-risk transfer in history was set to clear, two Verizon retirees have filed a lawsuit attempting to block the $7.5 billion transaction.

The complaint, submitted in district court in Dallas, alleges that the “Verizon/Prudential transaction places the affected retirees in an inferior safety-net.”

Both sides agree that the handover will strip all 41,000 members involved of the security afforded by the Employee Retirement Income Security Act (ERISA) and Pension Benefit Guaranty Corporation (PBGC). As annuity holders, the retirees will instead fall under insurance guaranty regulations, which vary from state to state.

Verizon claims these protections are on par with ERISA and the PBGC. The telecom giant has not filed counterarguments in court, but Randal Milch, executive vice president and Verizon’s general counsel, released a statement dismissing the allegations.

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“This lawsuit is without merit,” Milch said. “Verizon’s actions regarding its pensions protect the interests of our retired management employees. The monthly pension benefits of the retirees receiving an annuity from Prudential will remain unchanged. Prudential is providing an irrevocable commitment to make all future annuity payments, and this promise will be supported by the extra protection of assets being placed in a separate account at Prudential dedicated to Verizon retirees.”

The lawsuit’s two plaintiffs—who are filing a class action on behalf of all 41,000 members—argue that no level of commitment from Prudential could compensate for the loss of federal backing. In the event that Prudential could not meet its payment obligations, the lawsuit alleges, “insufficient and varying” state coverage would take over.

“I’m not worried about Prudential in the next few years, but the average age of these members is about 70,” Edward Stone, an insurance/finance attorney and counsel for the retirees, told aiCIO. “Many will likely live until 90. And 10 or 20 years down the road: who knows?”

“Pension-risk transfer is extremely new, and there’s no legal precedent set yet,” he continued, “You get cowboys at the forefront in these situations. But at the end of the day, this is such a serious issue, there has to be transparency and uniformity in the annuity guaranty.”

In his statement for Verizon, Milch stessed Prudential’s solidity and capacity to take on the obligation.

“Prudential has a long history of providing group annuity benefits and already provides pension plan services to 3.7 million workers and retirees nationwide,” he said. “An independent fiduciary conducted an extensive review of the insurance market and annuity providers and selected Prudential as the annuity provider, with the safety and protection of pension plan participants being the sole consideration.”

The two parties have until December 6 to submit briefs to the Dallas court, which will decide the following day whether or not to bar the deal from closing.

(November 30, 2012) — Low transaction cost; custom terms; the backing of a strong legal system.

Pick two.

Contracts are all about tradeoffs, but according to two top researchers, investors all-too-often slip into default mode for this critical stage of deal making.

But just how exactly does one decide between basing a contract in London, or a low-regulation offshore haven like the Cayman Islands? And when are the hefty legal fees of a custom job worth the tailored terms?

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Ashby Monk and Gordon Clark, visiting finance/geography researchers at Oxford and Stanford, respectively, endeavored to break down the characteristics of asset management contracts in the global marketplace. Their paper, “The Geography of Contract in the Global Financial Services Industry,” published November 21, takes up two staples of asset management arrangements: London-based contracts and the standard Investment Management Agreement (IMA) template.

The former, Monk and Clark argue, has earned its popularity.

“By our account, London thrives because of the density of market intermediaries found in the city (compared to the major financial centers of continental Europe) and the fact that these services are available in a jurisdiction that offers accepted terms and conditions underpinned” by a supportive judicial system.

European financial institutions may be under “an unwelcome shadow” from the UK hub, but the authors say they nevertheless rely on the experience and expertise found in London. According to Ashby and Clark, this reliance is further reinforced by low transaction costs.

“London provides off-the-shelf standardized contracts for most financial services,” according to the paper, such as the IMA for asset management arrangements. These standardized forms come with pre-approval by industry associations and professional bodies, guidance from contract specialists, and the tacit blessing of regulatory bodies.

But this is where the tradeoffs—and second staple of institutional contracts—come in.

The standard IMA is a means of economizing on transactions costs. According to Clark and Ashby, however, service providers often rely on the IMA’s familiarity and broad acceptance to gloss over the fact that it can become “a mechanism for holding clients hostage who have neither the resources nor the sophistication to rewrite contracts in their own interests.”

Still, few asset owners have the resources to commission bespoke contracts for every negotiation, or the desire to spend those resources on legal fees. Clark and Ashby propose wresting control of contract design from service providers, in favor of common contracts specific to categories of financial institutions and products.