Three lawsuits - two against AT&T and one against Lockheed Martin - are questioning decisions to mitigate corporate risk exposure to pension obligations by a process labeled "pension risk transfer".

Plaintiffs concede the process itself is perfectly legal, but question the prudence of the decision to "offload" that pension responsibility to parties, and more specifically, to one party in particular - which plaintiffs allege is less financially viable to fulfill those obligations.

AT&T has chosen to transfer its pension risk to an allegedly "risky new insurance company that is dependent on its Bermuda-based subsidiary and which has an asset base far riskier than AT&T's."

In the AT&T suit, plaintiffs claim 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." Moreover, the benefits were further assured by the Pension Benefit Guaranty Corporation ('PBGC'), because AT&T funded and the Plan paid premiums to the PBGC for each of the 96,000 plan participants.

The plaintiffs allege, however, that after the transfer in 2023, AT&T no longer guarantees payment of the retirement benefits and is no longer subject to ERISA's funding requirements. A second AT&T suit makes similar allegations, agreeing the risk transfer is a settlor decision. However, it contends the selection of the party to transfer those obligations to is a fiduciary consideration, and the chosen provider, Athene, an Apollo Global Management subsidiary, was imprudent and puts retiree benefits at risk because it is relying on its captive reinsurer located in Bermuda to take advantage of Bermuda's favorable regulatory regime. "Pension Risk Transfers Trigger New ERISA Litigation" www.napa-net.org (Mar. 19, 2024).

Commentary

The Department of Labor's 1995 interpretive bulletin (IB) § 2509.95-1, titled: Interpretive bulletin relating to the fiduciary standards under ERISA when selecting an annuity provider for a defined benefit pension plan, states, in relevant part:

The selection of an annuity provider for purposes of a pension benefit distribution, … is a fiduciary decision governed by the provisions … ERISA. In discharging their obligations … fiduciaries … must take steps calculated to obtain the safest annuity available… . In addition, the fiduciary obligation of prudence, … requires, at a minimum, that plan fiduciaries conduct an objective, thorough and analytical search for the purpose of identifying and selecting providers from which to purchase annuities. In conducting such a search, a fiduciary must evaluate a number of factors relating to a potential annuity provider's claims paying ability and creditworthiness. … In this regard, the types of factors a fiduciary should consider would include, among other things:

(1) The quality and diversification of the annuity provider's investment portfolio;

(2) The size of the insurer relative to the proposed contract;

(3) The level of the insurer's capital and surplus;

(4) The lines of business of the annuity provider and other indications of an insurer's exposure to liability;

(5) The structure of the annuity contract and guarantees supporting the annuities, such as the use of separate accounts;

(6) The availability of additional protection through state guaranty associations and the extent of their guarantees (italics added).

These may be the first of many lawsuits questioning the choice of provider in risk mitigation pension transfer situations. Assuming IB-95's benchmarks are met, it remains to be seen if courts will take up the question of whether one chosen provider is "riskier" than another, all other factors being equal.