A new lawsuit filed by three management retirees against Verizon Communications and its independent fiduciary State Street Global Advisors regarding a recent pension buyout transaction could represent a material threat to the future of pension risk transfers if not dismissed, legal experts say.
The three retirees' lawsuit, filed Dec. 30 in U.S. District Court in New York, alleges Verizon and SSGA violated their fiduciary duties under the Employee Retirement Income Security Act of 1974 by obtaining the “cheapest available annuity provider” as opposed to the “safest available” annuity provider as required by Interpretive Bulletin 95-1.
IB 95-1 is the U.S. Department of Labor’s Employee Benefits Security Administration guidance related to the fiduciary standards of pension risk transfer transactions that requires plan sponsors purchase the “safest annuity available.”
The lawsuit is related to New York-based Verizon’s purchase of group annuity contracts from Prudential Insurance Co. of America and RGA Reinsurance to transfer about $5.9 billion in pension plan liabilities, representing the benefits of about 56,000 retirees and beneficiaries. Prudential and RGA, which took on the responsibility of paying benefits on July 1, are not defendants in the lawsuit.
The lawsuit alleges Verizon and SSGA did not property vet the insurance companies because used substandard annuities from affiliates domiciled in “regulation light jurisdictions.”
A spokesperson for Verizon said in a statement, “The lawsuit is completely without merit. Verizon will defend the matter vigorously.” An SSGA spokesperson declined to comment.
Kent Mason, partner with law firm Davis & Harman, said he sees no merit in this lawsuit, which follows a group of lawsuits filed by various retirees in 2024 against firms including AT&T Corp., Lockheed Martin Corp. and General Electric Co., all still in progress, which alleged the companies violated their fiduciary duties by not completing transactions with the “safest annuity available.”
Notably, all those companies completed transactions with Athene Holding and/or its subsidiaries, none of which are defendants in the lawsuits. Athene, which is owned by alternatives giant Apollo Global Management , has been targeted as a “risk-taking insurer” by the lawsuits, which claim its ties to Apollo makes the insurer unsafe. The insurer has vigorously denied those allegations, citing its excellent credit rating and significant capital holdings.
Not limited to Athene
Mason said there is disagreement within the industry whether the Athene-related lawsuits in 2024 were going to be limited to Athene, and the new lawsuit shows the PRT litigation was never going to be limited to that insurance company.
“As I have been saying ... since the first suit was brought, if these suits survive the motions to dismiss, the suits will clearly spread well beyond Athene and are a material threat to the entire PRT business,” he said in a written summary provided to Pensions & Investments. “This is not because the suits have any merit. Rather, it is because lawsuits are a business from the perspective of the plaintiffs’ firms; if they can survive a motion to dismiss and get a settlement, they will keep suing and suing, as we have seen in the defined contribution fee area.”
Verizon is no stranger to PRT-related lawsuits.
The company’s first large pension buyout transaction in 2012 transferred $7.5 billion in pension liabilities. Prudential was the sole insurer in that transaction, and a lawsuit by management retirees swiftly followed that was ultimately dismissed following four years of legal wrangling.
Mason said the new lawsuit is very different from the previous lawsuit against Verizon, which did not emphasize the idea of the “safest annuity available.”
“(In 2012), they threw everything against the wall to see if something would stick, and really nothing stuck,” said Mason.
Among the arguments by plaintiffs in the 2012 was that ERISA required consent from the retirees to have their liabilities transferred and that removing the protections of the Pension Benefit Guaranty Corp. by transferring the liabilities was a violation of ERISA, Mason said.
The courts, however, said that ERISA allows for the transferring of liabilities to insurance companies through full or partial plan terminations, so ultimately the lawsuit was dismissed.
“The courts really said: Was this just a variation on a plan termination? Yes, in the sense that instead of terminating the whole plan, it essentially terminated part of the plan, and that’s clearly contemplated by ERISA and inevitably has to be contemplated,” said Mason. “You wouldn’t want people to be forced to maintain plans permanently. So I don’t think the arguments were particularly refined and they were dealt with.”
Nancy Ross, partner at law firm Mayer Brown, said in an interview she was surprised by the new lawsuit, particularly because it was so focused on Prudential.
“I recall that back in the day before there was any litigation about these transfers that one issue that companies were advised to consider was whether the annuity company had the assets sufficient to take on the respective PRTs that were under consideration, so when I saw this I really wondered if that’s what they were complaining about but I didn’t really see anything of any substance in the complaint that would suggest that,” said Ross.
Ross said there is nothing illegal about pension risk transfer transactions, and the question becomes how a company assesses these transactions.
“I feel that it’s appropriate that you need to engage an annuity provider who does have the resources to secure these,” said Ross. “Prudential doesn’t strike me as not having those resources. They’re a household name.”
Founded in 1875, Prudential Financial reported $1.56 trillion in assets under management as of Sept. 30.
'Erroneous allegations'
Dylan Tyson, president, Prudential's retirement strategies business unit, said in a statement that while the insurer is not a party to the lawsuit, it “vehemently denies the unsubstantiated and erroneous allegations made against it in the complaint.”
“In filing this lawsuit, class-action attorneys are attacking the state insurance regulatory system, the health of the entire pension risk transfer industry, and the very retirees whose pension obligations are safeguarded through these transactions,” said Tyson. “All of Prudential’s reinsurance transactions are structured and executed in full compliance with legal and regulatory requirements, under the robust oversight of our insurance regulators. Prudential is widely regarded as a safe and secure insurance company and diversified financial services organization, with exceptional financial strength and stability.”
“We believe in the quality of the pension risk transfer market and the important role that this market and Prudential will continue to play in providing stability to plan sponsors and retirement security to the individuals we serve,” Tyson said.
A spokesperson at RGA Reinsurance echoed Prudential’s denial in its own statement on the Verizon lawsuit, saying the claims alleged “are baseless and will ultimately not succeed.”
Ross said in her interview that the plaintiff’s attorneys have filed this lawsuit as a “test case” and that this trend of lawsuits does not pose a dangerous threat … yet.
“They’re putting out their feelers and so I would not qualify it yet as a dangerous trend,” said Ross. “I would say if the motions to dismiss these cases are rejected then we’re entering into that territory … We’re going to see more of these.”
Plaintiffs’ attorneys Elizabeth Hopkins, a senior partner at law firm Kantor & Kantor and head of the law firm's pension practice who was recently named to the DOL's ERISA Industry Committee, and Edward Stone of Edward Stone Law, did not respond to requests for comment.