Verizon/Prudential Pension-Risk Transfer Survives Court Challenge

(December 7, 2012) – A district court in Dallas ruled today that Verizon’s $7.5 billion pension-risk transfer to Prudential can proceed, despite two retirees’ last-minute lawsuit to block the transfer.  

The deal is set to be one of the largest in history—though trailing in value to Prudential’s recent $26 billion transaction with GM. 

The court struck down the retirees’ claim that Verizon breached its fiduciary duties, and violated the Employee Retirement Income Security Act (ERISA). The plaintiffs had argued that the transfer was not authorized by the pension plan documents, and in pursuing it Verizon acted against members’ best interests. 

However, the court ruled that the “Plaintiffs’ fiduciary duty claim necessarily fails because it is not a fiduciary act to amend or terminate a pension plan.” Furthermore, the “purchase of the annuity contract is expressly authorized by Verizon’s amendment to…the plan, adopted October 17, 2012, and effective December 7, 2012.”

Verizon in fact entered into a Definitive Purchase Agreement with Prudential and an independent fiduciary for the annuity purchase on the same day it changed the plan to allow such a transaction, according to various court documents. Altering the pension’s policy was within Verizon’s legal rights, the court ruled: “Although there is a fiduciary duty in selecting an appropriate annuity provider, the decision to amend a plan to purchase an annuity does not implicate a plan fiduciary’s duties.”

The complaint, filed by William Lee and Joanne McPartlin on November 27, alleges that the “Verizon/Prudential transaction places the affected members in an inferior safety-net.” Both sides acknowledge that the handover would strip all 41,000 retirees involved of the pension protections legislated in ERISA and by the Pension Benefit Guaranty Corporation (PBGC). As annuity holders, the retirees will instead fall under insurance guaranty regulations, which vary from state to state. 

Prudential argued in its court filings that retirees would in fact be “better off after the transaction than they were before, and more secure in their expected retirement payments.” 

The court ruled that the “the annuity contract will provide the same rights to future payments, such as survivor benefits, as each retiree currently has…Plaintiffs have failed to establish a substantial likelihood that Verizon has a specific intent to interfere with their rights under the [pension] Plan and ERISA.” 

Verizon’s response to the lawsuit included sworn statements from its heads of employee benefits, Chief Investment Officer Ronald Lataille, and risk-transfer guru Ari Jacobs. 

Jacobs, a senior partner at consultancy AonHewitt, said Verizon hired him and Hewitt EnnisKnupp (an Aon subsidiary) in 2011. The company asked the consultants to compare the expected security of an ERISA-backed pension plan and group annuity contract, according to Jacobs. In the affidavit, his conclusion is substantially more conservative than Prudential’s stance. Jacobs set out six conditions for robust annuity security: a Prudential-level provider; fully-funded status through a separate account; backed by the insurer’s general account; governed by strict regulations; overseen by government regulators; and subject to state insurance guaranties. If all of these are met, then retirement “income is properly regarded as well protected by meaningful safeguards.” 

Jacobs did not offer any holistic comparisons between the security of ERISA/PBGC-backed pension plans and life annuities. 

A number of industry players, including corporate CIOs and insurance experts, have expressed concern that corporate appetite for risk transfers is outpacing aging regulation. (When Gerald Ford signed ERISA into law in 1974, the first major pension-to-annuity transaction was still nearly forty years off.) 

“It’s not that I’m against pension-risk transfers,” Edward Stone, a legal counsel to the retirees, recently told aiCIO. But they are “extremely new and there’s no legal precedent set yet…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.”

The Verizon-Prudential transaction must close by December 17 or be renegotiated, according to the annuity purchase agreement, which was published in court filings.