Plan sponsors interested in removing pension liabilities from their balance sheets have been waiting with interest to see the end result of the challenge by Verizon retirees to Verizon’s deal with Prudential annuitizing benefits of 41,000 retirees.

Plaintiffs failed to stop the purchase, but continued their fight in court. Even after their claims were largely dismissed, plaintiffs were allowed to file an amended complaint and given another “bite at the apple”.

A new and possibly final decision has been issued clearly affirming the rights of plan sponsors to transfer their liabilities to third party insurers. Although plaintiffs might appeal, the reasoning in this decision should provide support for de-risking strategies, including those that permanently shed liabilities through arrangements that are popularly referred to as “buy-outs”.

Below, are the claims made by two classes of plaintiffs – those who were annuitized and those remaining in the ongoing plan – that were dismissed in the decision:

  1. The remaining participants had argued that unreasonably high expenses were an improper payment from the trust and depleted the assets available to pay their benefits. The court ruled that this group of participants had no standing to pursue their claims.
  2. The retirees who were annuitized challenged the purchase as a breach of fiduciary responsibility on numerous grounds. These claims were rejected when the court ruled that:
  • Verizon didn’t breach any fiduciary duties when it amended the plan to specifically provide for annuity purchases or failed to consult the retirees about this purchase. The court said, consistent with long-established law, that amendment of the plan was a settlor function not a fiduciary one.
  • Verizon and the plan fiduciaries did not breach any fiduciary duty of prudence when they annuitized all of the benefits with Prudential rather than a number of annuity providers shortly after the amendment. The selection of an annuity provider is a fiduciary function, but Verizon was able to prevail on this issue because it had retained an independent fiduciary in advance to represent the participants in connection with the annuity purchase and to ensure its compliance with ERISA requirements.
  • ERISA did not require Verizon or the plan fiduciaries to place the annuity contract, as an asset of the plan, in its trust in order to preserve PBGC insurance coverage and maintain ERISA protections for the retirees. (This alternative, called a buy-in, does not transfer obligations irrevocably to an insurer or remove liabilities from the corporate balance sheet.) This also was a settlor, not a fiduciary decision.
  • The almost $1 billion dollars paid from plan assets to Prudential as expenses were permissible and were not required to be paid directly by Verizon. They were not on their face unreasonable administrative expenses, given the $8.4 billion total cost of the transaction, and payment of these expenses from plan assets did not violate the “exclusive benefit rule”.

We think that these issues were correctly decided in accordance with long-standing U.S. legal interpretations.

This latest Verizon decision concludes by stating that any remedies the retirees get must come from Congress in the form of changes in the law. Plan sponsors considering buy-outs should take into account that the law may change in the future. For example, the ERISA advisory council has considered whether additional rules should be imposed on de-risking transactions.

While de-risking might not be appropriate for all plans, the possibility of changes to the law is one more factor for the decision tree that already includes increasing PBGC premium rates and predictions of future investment returns, annuity purchase rates and participant mortality. Companies that go ahead with annuitization would do well to follow Verizon’s lead in retaining an independent fiduciary, and documenting and following their amendment and decision-making processes.