March is coming in like a lion with a new “genre” of ERISA litigation.
While it’s early yet, two—and now three—recent suits—filed by different law firms in different federal district courts—might be the first of a new wave of litigation. All focus on decisions to mitigate corporate risk exposure to pension obligations by a process labeled (appropriately enough) pension risk transfer.
The suits—two now targeting AT&T, the other Lockheed Martin—acknowledge that the process itself is perfectly legal, but question the prudence of the decision to “offload” that pension responsibility to parties—more specifically one party in particular—deemed less financially viable to fulfill those obligations.
AT&T
The plaintiffs in the first AT&T suit filed March 11 in the United States District Court for the District of Massachusetts (Piercy et al. v. AT&T Inc. et al., case number 1:24-cv-10608)—with plaintiffs represented by none other than Schlichter Bogard LLP—alleged that AT&T “decided to fatten its wallet by placing its retirees’ futures in the hands of a risky new insurance company that is dependent on its Bermuda-based subsidiary and which has an asset base far riskier than AT&T’s”—pocketing “more than $360 million in profit from this scheme.” The suit also names State Street, who the suit says assisted in the transaction and “profited handsomely as well.”
The AT&T suit claims that “before the transaction, Plan pension benefits were guaranteed by AT&T—a Fortune 15 business and one of the world’s largest telecom companies—which was responsible for paying the benefits as they came due, even if Plan investments fell short of expectations. AT&T was also obliged by ERISA’s funding requirements to protect the Plan’s financial health by making additional contributions to the Plan when necessary. And the benefits were further assured by the Pension Benefit Guaranty Corporation (‘PBGC’), the federal agency charged with insuring pension benefits, because AT&T funded and the Plan paid premiums to the PBGC for each of the 96,000 participants. After the 2023 transfer, none of this is true. AT&T no longer guarantees payment of the retirement benefits. AT&T is no longer subject to ERISA’s funding requirements as to these liabilities.”
The second AT&T suit—also filed in the same district court (Schloss v. AT&T Inc., D. Mass., No. 1:24-cv-10656, 3/15/24)—with plaintiff represented by Naumes Law Group—makes similar allegations, both basically alleging that while the decision to undertake pension risk transfer is a settlor decision, the selection of the party to transfer those obligations to is a fiduciary consideration—and that the provider chosen (Athene[i], an Apollo Global Management subsidiary that’s not named as a defendant) was imprudent and put retiree benefits at risk.
Lockheed Martin
The suit filed against Lockheed Martin (Konya et al. v. Lockheed Martin Corp., case number 8:24-cv-00750, in U.S. District Court for the District of Maryland)—with plaintiffs also represented by Schlichter Bogard LLP (and Darby Law Group LLC) also targets the decision to transfer those pension obligations to Athene. That transfer took place in two transactions—August 2021 (nearly $5 billion in pension obligations for 18,000 retirees to Athene) and in June 2022 an additional $4.3 billion in pension obligations (also to Athene) for 13,600 retirees, according to the suit.
“Instead of selecting the safest possible annuity to ensure that their employees and retirees would have continued financial security of Lockheed employees and retirees, Lockheed Martin selected Athene, which is substantially riskier than numerous traditional annuity providers,” the suit notes. “Because the market accounts for risk in pricing investments, it is likely that Lockheed saved money by selecting Athene instead of the safest annuity available. Putting the company’s financial interest in saving money ahead of participants’ interests in retirement security by selecting a riskier annuity provider is an egregious act of disloyalty,” it continues. “By transferring Plaintiffs’ pension benefits to Athene, Lockheed Martin put its employees’ future retirement benefits at substantial risk of default….”
PRT ‘Prudence’
For those not familiar with the underpinnings of the pension risk transfer (PRT—because we need another acronym), IB 95-1, issued by the Department of Labor in 1995 (in the wake of the Executive Life collapse), outlines the fiduciary standards to be used in selecting an annuity provider for a pension risk transfer. That includes considerations of the provider’s investment portfolio, size relative to the annuity contract, level of capital and surplus, liability exposure and availability of state government guaranty associations.
The SECURE 2.0 Act of 2022 required the DOL to review IB 95-1 and recommend possible modifications to Congress by the end of 2023—but that hasn’t happened yet.
Stay tuned.
NOTE: In litigation there are always (at least) two sides to every story. However factual it may turn out to be, the initial lawsuit in any action is only one side, and one generally crafted toward a particular result. In our coverage you'll see descriptions of events qualified with statements such as “the suit says,” or “the plaintiffs allege”—and qualifiers should serve as a reminder of that reality.
[i] Described in the most recent AT&T suit as “a paradigmatic example of a Risk-Taking Insurer.” The suit comments that “Athene and Apollo pioneered much of the risky conduct characteristic of the Risk Taking Insurers. Athene is today a prime example of an insurer that has grown its shadow banking business by assuming an organizational structure that allows it to engage in risky conduct with former pension plan assets. As with other insurers engaging in such shadow banking, a central feature of Athene’s organizational structure today is the location of its captive reinsurer in Bermuda to take advantage of Bermuda’s favorable regulatory regime.”
