Companies transferred billions in pension assets to annuities. Here come the lawsuits

The past couple of years have been an absolute boon for insurers that help employers offload their pensions obligations to group annuity contracts. But now, companies including AT&T and Lockheed Martin are facing lawsuits over that practice, and more cases are likely coming.

This week, those firms, along with State Street Global Advisors, were sued by groups of plaintiffs seeking class-action status and claiming that the companies did wrong by moving ERISA-protected retirement assets to products with state-level oversight, particularly to one insurer: Athene Annuity and Life Co. State Street recommended Athene as the annuity provider for AT&T, according to the complaint against it.

“Lockheed Martin egregiously violated its fiduciary responsibilities in selecting an annuity provider to pay pension benefits for 31,000 employees. Since 2021, Lockheed Martin has offloaded over $9 billion in pension obligations to Athene … a private-equity controlled insurance company with a highly risky offshore structure,” the complaint filed against that company read. As a result, the Lockheed plan participants “are no longer subject to the [Employee Retirement Income Security Act] statute’s protections for employee retirement benefits.”

That lawsuit was brought by a firm all but synonymous with ERISA litigation over nearly two decades – Schlichter Bogard, which in 2006 set in motion the wave of 401(k) excessive-fee cases that continues today and was behind many of the 403(b) lawsuits against Ivy League universities filed starting in 2016.

Though the case against AT&T and State Street was filed in the same week, the firms behind that lawsuit are different: Zuckerman Spaeder, Edward Stone, Kantor & Kantor, and Libby Hoopes Brooks & Mulvey.

The plaintiff's firms in both cases declined to comment or did not respond to interview requests.

Lockheed Martin generally does not comment on pending litigation, a company spokesperson said in an email.

In a statement, AT&T said, “We deny the allegations and we will defend ourselves in court.”

A State Street spokesperson indicated that that company would not comment.

Athene, which is not a party in either of the lawsuits, said in a statement that it believes the 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," a company spokesperson said in an email. "All plan participants and beneficiaries continue to receive 100 percent 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."

PENSION RISK TRANSFERS

Up until recently, corporate pension plans have often struggled with their funded ratios, despite being closed to new employees. Investment performance and rising interest rates have helped change that, and over the past couple of years, many have taken the opportunity to transfer assets to group annuity contracts. Those arrangements, known as pension-risk transfers, reached a record volume of $48.3 billion in 2022, which was a 42 percent increase over activity in 2021, data from Limra show.

During the third quarter of 2023, there were more pension-risk transfers done than ever before in a single quarter, and total single premium buy-out assets represented more than $256 billion, an 11 percent increase over the third quarter of 2022, according to Limra.

Athene has been a big winner in that trend, with more than $10 billion in pension group annuity sales in 2023.

A survey last year commissioned by MetLife of companies with pension plans showed than 89 percent were interested in offload those assets via pension-risk transfers.

While getting rid of pension obligations gives companies less to worry about, the practice has been criticized for potentially leaving workers and retirees with a lower level of protection.

"The trend of de-risking has been around for quite some time. The idea is for employers to get these risks off their balance sheets and to insurance companies," said Andrew Oringer, partner at The Wagner Law Group. "Annuitizing a pension was like a dirty little secret until the Executive Life [Insurance Co.] debacle years ago," he said, referring to that insurer's insolvency in 1991.

It used to be more common for companies to transfer pension assets to annuities only when they were terminating plans, but now it's common to do so in advance of termination, Oringer noted.

Plaintiffs' lawyers will make arguments that the choice of a particular annuity was substandard, he said. If it happens that the cases lead to large recoveries, or at least survive motions to dismiss or motions for summary judgment and end in settlements, that could mean more such cases.

"The plaintiff’s lawyer is making an investment in the theory of the case, in the type of case," Oringer said. "Plaintiffs’ lawyers have business models, and if it becomes evident that these cases are banging one’s head against a wall, they will be more likely to move on."

[More: Schlichter’s message to pension sponsors: Be very careful with PRTs]

PROCESS MATTERS

ERISA doesn't prevent employers from moving pension assets to group annuity contracts, something even the lawsuit against Lockheed Martin mentions. The cases hinge on how the companies selected the annuity providers.

If the lawsuits progress, there's a lot that observers might learn about how companies solicit and evaluate bids, said Norman Stein, senior policy counsel and acting legal director at the Pension Rights Center.

Aspects of an insurance company, such as whether it provides life insurance – considered a natural hedge to an annuities business – and how heavily it uses reinsurance, could be things that fiduciaries consider when deciding on providers, Stein said. How much cost plays a role could also be revealing, he said.

“My own view is that it’s not the ownership structure so much as the kinds of practices they have,” he said. Even so, “if I were a fiduciary, and I was given a choice between a very well-regarded insurer that’s also in the life insurance business, that has been doing this for a very long period of time … and Athene, which some people say is fine and others say is riskier, I just wouldn’t choose Athene in those circumstances, unless something else was going on.”

In the lawsuit against Lockheed Martin, plaintiffs allege the company breached its fiduciary duties, engaged in prohibited transactions and failed to monitor fiduciaries. The case against AT&T and State Street alleges breaches of fiduciary duties and prohibited transactions by both firms.

Editor's note: This story was updated with comments from Athene.