Over the last several years, numerous large pension plan sponsors have transferred billions of dollars in financial risk related to their pension plan benefit obligations to insurance companies through the purchase of group annuities. Known as pension risk transfer (PRT), these actions have now led to two recent proposed class action lawsuits against AT&T and Lockheed Martin. The plaintiffs are claiming that the plan fiduciaries breached their fiduciary duty in the selection of the PRT annuity provider.
PRT is not a new concept. In fact, the Department of Labor (DOL) issued PRT guidance in 1995. Interpretive Bulletin (IB) 95-1 sets forth what the DOL views as the fiduciary standards placed on an employer in the selection of an annuity provider for a pension risk transfer. As this guidance nears its 30th year, Congress thought a refresh might be in order. As part of SECURE 2.0, Congress instructed the DOL to review IB 95-1 and recommend potential modifications to them by the end of last year. The DOL has not done so to date.
For plan sponsors considering a PRT strategy, the DOL guidance provides important parameters for selecting an annuity provider. The evaluation should include a review of the insurer's claims paying ability and creditworthiness. The guidance then instructs the fiduciary to “take steps calculated to obtain the safest annuity available, unless under the circumstances it would be in the interests of participants and beneficiaries to do otherwise.”
Factors the fiduciary should consider are:
- the quality and diversification of the annuity provider's investment portfolio;
- the size of the insurer relative to the proposed contract;
- the level of the insurer's capital and surplus;
- the lines of business of the annuity provider and other indications of an insurer's exposure to liability;
- the structure of the annuity contract and guarantees supporting the annuities such as the use of separate accounts; and
- the availability of additional protections through state guaranty associations and the extent of their guarantees.
AT&T and Lockheed Martin both used the same insurance provider for their PRTs which plaintiffs characterized as a “risky new insurance company” and not “the safest annuity available” as IB 95-1 would require. It is not clear whether similar concerns would be voiced with other insurance providers or if these cases are outliers based on a particular provider.
These cases are both in the infancy stage. Whether or not we are observing a new ERISA litigation trend, however, may soon become apparent. As AON notes in its March 2024, “U.S. Pension Risk Transfer” report, we may expect to see a continued interest in PRT due to funded status improvement, rising interest rates and increasing Pension Benefit Guaranty Corporation premiums. If you are considering a PRT, these recent cases should not prohibit you from doing it. Just remember that your fiduciary duty requires that you carefully choose an annuity provider after you conduct a thorough analysis of available options and closely follow the guidance in IB 95-1.
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