In our March 13 webinar on de-risking defined benefit pension plans, I stated that the U.S. litigation launched by a group of Verizon retirees challenging the annuitization of their pensions was not dead, even though a federal district court refused to stop the purchase of annuities from Prudential, and the annuities were purchased in 2012. (For those of you who missed it, here is a link to the podcast of our U.S. webinar covering de-risking.) There have been some new developments in the Verizon litigation of interest to all sponsors considering de-risking through transferring liabilities to insurance companies.

Plaintiffs have filed an amended complaint alleging breaches with respect to the non-annuitized participants and alleging that the pension plan was not 80% funded, which, if true, would prevent full annuitization of their benefits due to restrictions on “prohibited payments” that apply to underfunded plans. Verizon responded by filing documents with the court indicating that the plan was at least 80% funded. Verizon also made a motion to dismiss the lawsuit for failure to state causes of action under ERISA, essentially stating that there is no basis under the law for the retirees’ challenge.

The court most recently certified two groups of plan members who would be allowed to sue Verizon as a class.

The 41,000 retirees whose pensions were annuitized are now permitted to sue as a class on the following three issues: (1) whether Verizon violated its fiduciary duties, (2) whether Verizon discriminated against the group of plan members whose pensions were annuitized, and (3) whether the plan’s summary plan description should have described annuitization as a circumstance that could result in a loss or reduction of benefits (if the insurer was unable to pay).

The 50,000 plan members whose pensions were not annuitized were also permitted to sue as a class, but on 3 different issues: (1) whether use of plan assets to purchase annuities violated the plan terms or ERISA, (2) whether plan assets were used to pay costs that should have been paid by Verizon, and (3) whether buying the annuities violated the payment restrictions applicable to plans that are less than 80% funded.

Interestingly, the plan sponsor, Verizon, supported the class certifications. While that might seem against Verizon’s interest at first glance, if Verizon prevails, the broad class certifications will prevent retirees from bringing claims in other federal courts that might reach conflicting results. However, the broad class certifications could also help plaintiffs in financing the lawsuit and in negotiating a settlement.

Perhaps Verizon seems confident in the outcome, no doubt because annuitization of pensions is not a new process. As we discussed in the Osler webinar, existing law and regulations clearly contemplate that pension obligations may be irrevocably transferred to outside insurers and that the decision whether to annuitize benefits is not a fiduciary decision. However, the size of recent annuitization transactions is unprecedented, and it is possible that the judge or the Pension Benefit Guaranty Corporation might decide to make new law in this area. It is interesting to note that the issues certified include whether Verizon sufficiently disclosed the possibility of annuitization to participants, and whether retirees remaining in the plan were adversely affected by the manner in which assets were used for the annuity purchases.

Sponsors of defined benefit plans need to stay tuned for the outcome of the motion to dismiss.