Recent lawsuits targeting
Pension risk transfers are a popular way for employers to reduce benefit costs and manage risks. Under these transactions, workers are removed from the company retirement plan—and outside the protection of federal pension law—in exchange for annuity contracts from third-party insurers that are intended to fund their benefits.
Nearly 90% of companies plan to divest their pension plan liabilities in the future and the majority expect to use annuity buyouts, according to a 2023 survey by MetLife.
While pension de-risking has grown in popularity over the last decade or so, the cases against Lockheed Martin and AT&T are among the first to challenge the practice in court.
The lawsuits say Lockheed’s and AT&T’s transferring of the pensions of tens of thousands of workers to subsidiaries of
Like with other types of litigation over management of pension plan assets, the plaintiffs in these cases will have several hurdles, including proving they have standing.
The lawsuits acknowledge that pension risk transfers aren’t prohibited by the Employee Retirement Income Security Act. Instead, they take issue with whether AT&T and Lockheed sought out the safest available annuity.
Not Prohibited
There’s “no question” that employers are allowed to purchase annuities to cover workers’ pension benefits, so long as those annuities provide the same type of benefits guaranteed by the plan, said David R. Godofsky, a partner at Alston & Bird LLP and chairman of its retirement and insurance committee.
But Labor Department guidance requires employers seek out the “safest available annuity,” Norman Stein, senior policy counsel for the Pension Rights Center, said. That standard may not be satisfied if employers opt to work with an insurance company facing significant criticism instead of one that’s universally respected, he said.
The Pension Rights Center is a longtime critic of pension risk transfers and has advocated for stronger regulation of the practice.
Jerry Schlichter, managing partner of Schlichter Bogard LLP and counsel for workers suing both AT&T and Lockheed, said employers violate their legal duties when they overlook well-documented risks to choose annuity providers based on cost instead of acting in the exclusive interests of plan participants.
Schlichter’s cases, along with a similar lawsuit filed against AT&T by different attorneys, center on annuities provided by Athene, an
Athene called the cases “without merit,” saying it’s “well capitalized, properly reserved, soundly invested and highly rated.”
“We are a safe and secure provider of annuity benefits,” an Athene spokesperson said in an emailed statement. “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.”
AT&T denied the allegations against it and pledged to defend itself in court. Lockheed declined to comment.
Demonstrating Standing
One hurdle plaintiffs challenging pension risk transfers must overcome is showing they’ve suffered an injury giving them standing to sue.
“It’s difficult to justify the de-risking transaction as being in the interest of the plan participants, so really the case is going to come down to whether the plaintiffs have standing and whether anyone had a duty under ERISA to prevent the transaction, and who,” Mark Boyko, a partner with Bailey & Glasser LLP, said.
The US Supreme Court considered this issue in 2020, holding in Thole v. US Bank NA that pension plan participants lacked standing to challenge investment decisions that didn’t affect their ability to receive fixed benefits.
But Thole left open the possibility that workers might have standing to challenge pension mismanagement that’s so egregious it substantially increases the risk they won’t be paid, Ada W. Dolph, a partner with Seyfarth Shaw LLP, said.
The AT&T and Lockheed workers may be trying to thread that needle, she said, because their cases are based on the “threat of potential issues in the future” rather than injuries that have already happened.
Thole could pose a big problem for the plaintiffs in these cases, Godofsky said, because they’ll have to show a material risk that they will lose all or part of their benefits.
That would require showing that the annuity provider is likely to default, and that the relevant state insurance guaranty associations charged with protecting policyholders wouldn’t be able to step in and address the situation—two things Godofsky said are incredibly unlikely to happen.
But even though insurers aren’t likely to fail, “some of them are more likely to fail than others even if the degree of additional risk is not enormous,” Pension Rights Center’s Stein said.
Other Hurdles
Another difficulty facing workers could come when they seek class status.
According to Godofsky, workers who are moved from an employer-sponsored pension plan and into annuity contracts are subject to the protections of a state-by-state series of insurance guaranty associations aimed at protecting them in the event of default.
This 50-state patchwork will make it difficult for them to persuade a judge that the case can be resolved on a class-wide basis, he said.
The lawsuits could also hinge on whether the defendants can be considered fiduciaries under ERISA, Dolph said.
Despite these hurdles, there’s a decent chance these cases will proliferate.
“Plaintiffs’ lawyers don’t have to win cases to make a lot of money,” Godofsky said.
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