NEW ORLEANS - RJR Nabisco Inc. could end up forking over millions of dollars to former workers who lost their pensions when the company shut down a pension plan for a divested subsidiary and bought an annuity from Executive Life Insurance Co., Los Angeles.
A recent ruling by the 5th U.S. Circuit Court of Appeals, New Orleans, in Robert A. Bussian et al. vs. RJR Nabisco Inc., overturns a lower court's decision to throw out the case, and questions the process by which the pension plan sponsor picked the annuity provider.
The company chose Executive Life because it was the cheapest provider, allowing RJR, based in Winston-Salem, N.C., to collect the most when it terminated its pension plan in August 1987 and pocketed the surplus assets.
The company, now known as RJR Tobacco Holdings Inc., paid $54 million to Executive Life for the annuity, and recouped $43 million (after taxes) in surplus pension assets in May 1989.
Executive Life went belly up in April 1991, and some of the former participants did not get all of their pensions.
"We continue to believe that the summary judgment record supported the proposition that the company acted appropriately in all respects," said Willis J. Goldsmith, a partner in the Washington office of the law firm of Jones, Day Reavis & Pogue, which represents RJR.
The case is possibly the last big one involving fallout from the collapse of Executive Life.
The appellate court is sending the case back to the U.S. District Court for the Southern District of Texas, Houston, to determine if RJR violated its fiduciary duties under federal pension law, and to determine the money it owes to participants if indeed the pension plan sponsor was remiss in fulfilling its duties.
And while the court, on the surface, seemed to dismiss the Labor Department's 1995 guidance to employers shutting down their pension plans - that they "take steps calculated to obtain the safest annuity possible"- in fact the court's ruling agrees with the reasoning behind the agency's advice.
"We agree that beneficiaries and participants whose plan is being terminated gain nothing from an annuity offered at a comparative discount by a provider that brings to the table a heightened risk of default," the court noted. "We would even add that the purchase of such an annuity can be considered an example of the imposition on annuitants of uncompensated risk ... while the benefit is granted to the sponsor in the form of a lower price and a larger reversion."
Moreover, while the Labor Department's guidance focuses on the quality of the selected annuity, the court focused on the conduct of the employer, entrusted with keeping the participants' interests foremost and "taking all steps necessary to prevent conflicting interests from entering into the decision-making process."
In essence, said Marc I. Machiz, partner in the Washington law firm of Cohen, Milstein, Hausfeld & Toll PLLC, "the court's holding and the Department of Labor's holding in the interpretative bulletin seem to be virtually the same." Mr. Machiz was, until earlier this year, assistant solicitor in the Labor Department's pension office.
Randall W. Wilson, a partner in the Houston law firm of Susman Godfrey, representing the plaintiffs, said the court's decision "has implications any time a plan administrator wants to close out a plan and purchase annuities and the extent of the due diligence they want to employ."
Mr. Wilson says former RJR participants are seeking the pensions they were promised and did not receive.
Process is key
But the broader implications might be felt in the process employers use to choose investments other than insurance contracts that do not have a readily determinable market value, experts said.
"There are no shortcuts. You can't just open a book and look at the ratings, or just call your consultants," observed Sherwin S. Kaplan, of counsel to the law firm of Piper Marbury Rudnick & Wolfe in Washington. "You have to do a thorough analysis of what is best for employees." Mr. Kaplan is a former deputy associate solicitor in the Labor Department's plan benefits security division, and is familiar with this and other cases dealing with the fallout from Executive Life's collapse.
In January 1999, the Labor Department filed a brief supporting the Bussian case's appeal before the 5th U.S. Circuit Court, in which it noted that an employer that attempts to recapture the most surplus assets by purchasing a cheaper, riskier annuity is clearly violating the Employee Retirement Income Security Act.
"The plan had tens of millions of dollars more than the price of even the most expensive annuity considered by RJR. RJR could not choose the cheapest annuity in order to maximize the reversion of plan assets to itself, if another annuity better protected the participants' interest in the security of their retirement payments," the Labor Department's brief stated.
Specifically, the appellate court ruled that RJR "failed to structure, let alone conduct, a thorough, impartial investigation of which provider or providers best served the interests of the participants and beneficiaries."
The case arose out of RJR's plans in 1986 to terminate an overfunded pension plan for the employees of Aminoil USA, a Houston-based oil company it had purchased a decade earlier. RJR anticipated that after paying for an annuity it would recapture about $55 million.
RJR hired Buck Consultants Inc., New York, an employee benefits consulting firm, to help it pick an insurance company to provide the annuity. Bill Overgard, an investment consultant with Buck, was asked in January 1987 to identify insurance companies and give them information so they could participate in the annuity selection process.
Initially, Mr. Overgard sent a letter (without identifying RJR) to 13 insurance companies with which Buck was familiar, that had reputations for providing good service to their clients and could provide an annuity for about 10,000 participants.
Because more than 50% of Executive Life's investment portfolio consisted of low-quality bonds and other non-traditional investments for an insurance company, Mr. Overgard excluded Executive Life. In April, however, Paul Tyner, a senior RJR executive, asked that Executive Life be added to the list of insurance companies, primarily to create price competition because it was expected to come in with a low bid, according to the appellate court summary. Mr. Tyner did not anticipate RJR would actually hire Executive Life, the summary said.
To ascertain Executive Life's financial health, Buck relied on ratings awarded by commonly used rating services. Buck executives determined that Executive Life could be added to the list, but then discovered that Moody's Investor Services had given the insurance company a low rating. After discovering that the rating service had not talked with Executive Life management before issuing its rating, Mr. Overgard checked out the insurance company by talking with other insurance companies and investment bankers, who gave Executive Life a mixed review.
Mr. Overgard decided to keep Executive Life on the list of insurance companies.
The four finalists were Aetna Inc., Hartford, Conn., which asked for $61.9 million; AIG, New York, $60.2 million; Prudential Insurance Co. of America, Newark, N.J., $56.7 million; and Executive Life, $54 million.
Set 3 criteria
RJR had established three criteria that the annuity provider would have to meet - an AAA rating from Standard & Poor's Corp , New York; the ability to administer the plan; and approval from Buck.
Robert Shultz, hired that March as RJR's vice president of pension asset management, was responsible for making the final decision. But on the day the insurance company was being picked, Mr. Shultz was busy and attended only part of the meeting, delegating responsibility to other RJR officials, including Mr. Tyner, to help pick the annuity provider. After the bids came in and RJR officials picked Executive Life, Mr. Shultz gave the go-ahead in a telephone conversation with Mr. Tyner, even though he knew the insurance company had a large portfolio of junk bonds, was familiar with the allegations of connections between Executive Life and junk bond king Michael Milken, and knew that Executive Life and Mr. Milken had been part of the insider trading investigation by securities regulators, according to the appellate court documents.
Notwithstanding that information, Mr. Shultz gave Mr. Tyner the green light to hire Executive Life in August 1987. In May 1989, RJR received a net reversion of $43 million. By then, Mr. Tyner was aware that Executive Life was in financial trouble, but no one at RJR considered pulling out of the Executive Life arrangement, court documents said. RJR accepted the company's annuity contract in December 1989. In April 1991, California state insurance regulators took over the company. Eventually a consortium of French companies bought the remains of Executive Life and formed Aurora National Life Assurance Co.
Meanwhile, the participants did not receive their full pension benefits, and sued RJR in a class-action lawsuit in Texas in 1991, charging the company with violating its fiduciary duties. RJR moved the case to a federal court and asked for the lawsuit to be thrown out in 1992. In 1998, the lower court ruled in favor of the company. The participants then appealed the decision.