AT&T, Lockheed Martin pension buyout suits face hurdles, legal experts say

U.S. corporate retirement plan sponsors are full speed ahead on pension risk transfer transactions despite recent lawsuits that legal experts say face hurdles to avoiding early dismissals.

In March, two groups of AT&T retirees filed separate lawsuits against the telecommunications giant and independent fiduciary State Street Global Advisors, alleging a violation of fiduciary duties related to a 2023 pension buyout transaction; and four Lockheed Martin Corp. retirees filed a lawsuit against the defense company alleging similar violations related to two recent pension buyout transactions.

What the lawsuits have in common is the two companies each purchased group annuity contracts from Athene Annuity and Life Co. and Athene Annuity & Life Assurance Co. of New York. The AT&T purchase from the two Athene Holdings subsidiaries transferred $8.1 billion in U.S. pension plan liabilities and the responsibility of paying benefits to about 96,000 AT&T retirees and beneficiaries, and the two Lockheed Martin purchases in 2022 and 2021 transferred a combined $9.2 billion in U.S. plan liabilities and the responsibility of paying benefits to about 31,600 retirees and beneficiaries.

Each lawsuit alleges Athene is not safe.

Nancy Ross, partner at law firm Mayer Brown LLP, said the three lawsuits claim that Athene is unsound in part because it’s a subsidiary of Apollo Global Management, whose co-founder and former CEO Leon Black was alleged to have contributed to the failure of Executive Life Insurance through the sale of junk bonds to its parent company by Black’s firm Drexel Burnham Lambert.

The collapse of Executive Life in 1991 and the resulting losses to policyholders including liabilities transferred from pension funds led to the publishing of the Department of Labor’s Interpretive Bulletin 95-1, which relates to the fiduciary standards under the Employee Retirement Income Security Act of 1974 and provides guidance regarding plan sponsors purchasing the “safest annuity available.”

Ross believes that plaintiffs face multiple challenges.

“Plaintiffs will face a high hurdle proving constitutional standing under Article III of the Constitution because they have not and cannot show the requisite injury to bring a lawsuit since they are receiving the vested benefits to which they are entitled,” said Ross.

“Plaintiffs also will face a high hurdle in withstanding early dismissal of the lawsuit since their allegations do not mention any acts of the defendants showing misconduct by the fiduciaries,” she said. “Plaintiffs may be allowed the opportunity to bolster their complaints, but it is questionable whether they have the facts to do so.”

Kent Mason, partner with law firm Davis & Harman, said in an interview that the law does not state that a company is specifically required to find the safest available annuity.

“A court is not going to say, ‘You found ‘Number Two’ and it wasn’t ‘Number One’ and therefore, you are wrong,” said Mason. “What the law requires, and this is very clear, is that you use a prudent and diligent process to try to identify the safest available annuity, and that’s what the law is. If your process has been diligent and thorough and prudent, the fact that you may not have hit ‘Number One’ is not the point.”

Mason said the plaintiffs make it very clear in the court filings for the three lawsuits that they don’t know what that process was, and that their allegation is that process must have been poor since Athene was chosen as the insurance company.

What happens next, he said, will be the defendants’ motion to dismiss, saying there is no legal basis for the complaint.

“So, the question is, can you survive a motion to dismiss when you don’t know anything about the process that used to make the selection? And in my view, the answer is no,” said Mason.

Regardless, he said that critical point will be the motion to dismiss, and if the suits survive that motion and they move to discovery, an even greater flurry of similar lawsuits are likely to follow. Mason said this was not an “Athene-only” issue, that other insurers in the PRT space that have received similar criticism as Athene could be targeted.

That criticism has primarily targeted insurance companies owned fully or in part by private equity firms. Athene was established by Apollo Global Management in 2009, which remained a minority shareholder in the insurer until January 2022 when it closed a deal to fully acquire the insurer, which has been by far the highest-profile firm of this type.

An Athene spokesperson said regarding the lawsuits, “While Athene is not a party to any putative class action lawsuits involving pension derisking, we believe these cases are without merit.”

“Athene is well capitalized, properly reserved, soundly invested and highly rated. We are a safe and secure provider of annuity benefits,” said the spokesperson. “All plan participants and beneficiaries continue to receive 100% of their expected benefits. Our outstanding financial strength, our commitment to customer service and our well-diversified investment portfolio have made us a trusted provider of choice among pension plan fiduciaries.”

Experts in the pension risk transfer space, meanwhile, are not commenting on the lawsuits but see some questions ahead for plan sponsors.

Matt McDaniel, U.S. pension strategy and solutions leader at Mercer, said in an interview, “I think one of the open questions is: Will the headline risk of litigation make companies think twice either about doing a deal in 2024 or the insurer that they select if they do do a deal?”

“I think it’s too soon to say but certainly plan sponsors are aware of what’s going on there and are thinking about these kinds of things,” said McDaniel.

Michael Moran, senior pension strategist at Goldman Sachs Asset Management, said in an interview he doesn’t think the lawsuits will cause the volume of PRT transactions to slow down.

“It could at the margin maybe cause some sponsors to say, maybe just to avoid some headline risk, just go with a ‘more traditional insurer,'” said Moran.

Noting that there really is no definition for “traditional” necessarily, Moran said, “Maybe someone who has been at this for a longer period of time.”

Moran and others, however, said the PRT market remains robust. Two recent transactions will likely result in a record dollar volume for any first quarter of a calendar year. Transactions have historically taken place in the second halves of calendar years.

In February, Houston-based Shell USA purchased a group annuity contract from Prudential Insurance Co. of America to transfer about $4.9 billion in pension plan liabilities, and in March, New York-based Verizon Communications announced the purchase of group annuity contracts from Prudential and RGA Reinsurance to transfer about $5.9 billion in pension plan liabilities. Prudential has been a long-time player in the PRT space, while RGA just entered the PRT market in 2023.

According to a new report from Aon, U.S. pension risk transfer transactions totaled $45 billion and set a new record with a total of 773 transactions for 2023, an impressive 36% more transactions than the previous year.

While total dollar volume was down from over $50 billion in 2022, that dip was primarily due to the previous year’s pension buyout transaction by International Business Machines, Armonk, N.Y., which transferred $16 billion in liabilities to Prudential and Metropolitan Life Insurance Co. in 2022.

That was the second-largest transaction of its kind in U.S. history, and the AT&T deal — about half that size — was the largest in 2023.

The number of transactions, however, reflect how much interest there is among corporate plan sponsors in executing deals, and the continuing entry of new insurers into the marketplace that are doing deals — there are now 21 insurance companies doing PRT, compared with only six insurers in 2012 — show there is enough room for more transactions.

“I think 15 of the 21 insurers were over a billion dollars last year,” said McDaniel. “So that gives you a sense of not only is it a robust market in terms of number of players but also in terms of participation and insurers actually bidding on deals and winning these deals.”

Ari Jacobs, senior partner and global retirement solutions leader at Aon, said in an interview that the average estimated funding ratio among S&P 500 companies with defined benefit plans is currently 104.4%.

With many pension funds fully funded and sometimes overfunded, that makes pension buyout deals much more palatable, said Jacobs. Funding is often the largest obstacle in transferring pension liabilities.

“We continue to see the market thriving,” said Jacobs. He expects deal volume to be at least $40 billion again in 2024.