Athene-Linked Pension Cases Strike at Need for New DOL Guidance

Last year marked a record 773 corporate pension plans that opted to offload their funding liabilities in a practice known as pension risk transfer, a $45 billion premium market expected to grow in 2024. Now, a trio of cases challenging this practice could rattle the industry and put pressure on the US Labor Department to update 30-year-old guidance.

The three lawsuits—two against AT&T Inc. and one against Lockheed Martin Corp.—challenge the companies’ decision to transfer retirement assets to Athene Holding Ltd., a subsidiary of Apollo Global Management Inc. The plaintiffs in the cases describe Athene as “a private-equity controlled insurance company with a highly risky offshore structure.” Athene is not named as a defendant in the lawsuits.

The crux of the plaintiffs’ claims is that, while it’s legal under the Employee Retirement Income Security Act to engage in pension risk transfers—also known as “de-risking,"—AT&T and Lockheed violated their duties in conducting these transfers with Athene because the company is owned by a private-equity firm with a risky offshore structure.

READ MORE: AT&T, Lockheed Suits Mark First Real Test for Pension Transfers

Private equity firms are increasingly seeking to buy out or purchase stakes in annuity assets to gain access to a permanent capital stream in between short-term rounds of investments. Life insurers too are seeking foreign investors to re-insure their domestic risks. This new development adds a complex layer of obscurity to de-risking transactions that plaintiffs are eager to protect against in the absence of clearer federal guidance.

The lawsuits manifest an ongoing US Labor Department project to revisit the nearly 30-year-old guidance that instructs plans to choose the “safest available annuity” when shedding pension risks. Insurance lobbyists believe the rules should remain unchanged, while consumer activists want to protect savers from recent industry developments like private equity buy-outs and off-shore re-insurance investments.

As they await an already overdue DOL report to Congress this year, both sides of the pension de-risking debate already agree on one thing: Until regulators weigh in, the emerging trend of private-sector corporate litigation will grow.

“This is only going to continue,” said Brendan Maher, a tenured professor at the Texas A&M University School of Law. “When a company carries a pension obligation, there’s a significant burden associated with that. If a company can offload that obligation, they’ve literally lightened their load.”

De-Risking Growth

Athene has emerged as a top de-risking annuity provider since private-equity firm Apollo gobbled it up in 2021, scoring major deals with not only AT&T and Lockheed, but Alcoa Corp. and Pactiv Evergreen Inc. The company ended 2023 at the top of group annuity sales with $10.4 billion in total volume, according to LIMRA. Yet the company only entered the de-risking business in 2017. According to the complaints, since its inception Athene has completed 45 PRT transactions totaling $50.5 billion and covering over 550,000 plan participants.

Private equity firms had a stake in a little under 7% of the US insurance industry in 2020, according to the National Association of Insurance Commissioners. Independent players such as MetLife Inc. still dominate the pension risk transfer space, but Apollo-backed Athene now controls individual annuities and Blackstone Group Lp. has staked claims in American International Group Inc.‘s former retirement business line as well as Fidelity and Guaranty Life Insurance Co.

Uncertainty surrounding federal regulators’ position on private equity-fueled record-breaking profits is leading plan participants to take matters into their own hands, said Maher. Plan decisionmakers lose their accountability when pension assets leave the confines of a private-sector benefit plan and escape broad protections under ERISA.

“The money’s being transferred from a robust system of protections to a system that’s less robust,” he said. “If you knew that somebody owed you money, would you want the richest guy in the world owing your money or someone who doesn’t have a lot of money? We don’t know how much money they have.”

Should there be early success in the AT&T and Lockheed Martin cases, it could pave the way for other Athene customer participants to sue. Annuity-only providers such as Athene may be uniquely prone to risks, because they lack the asset diversification individual life insurers enjoy, said Norman Stein, senior policy counsel at the Pension Rights Center, which advocates for the return of more traditional defined-benefit pensions and opposes pension risk transfers.

But those risks are being overblown, said Preston Rutledge, a former assistant secretary of labor at the Employee Benefits Security Administration under former President Donald Trump consulting on behalf of the American Council of Life Insurers. The US insurance industry has been regulated by state insurance commissioners for decades. Those state regulators are best situated to understand the nuances involved with individual companies and enforce policy holder protections when insurers go under, he said.

“It’s just a different set of protections,” said Rutledge. “And I think both systems are excellent. The track record of the life insurance industry really is unmatched. It’s not that the pension system is a bad system, but the insurance industry may be stronger.”

Delayed Guidance

The SECURE 2.0 Act (Pub. L. No. 117-328) Congress passed in 2022 gave EBSA until late December 2023 to draft a report on whether to update its 1995 policy (29 C.F.R. § 2509.95-1) on annuity transfers. Although that deadline has already come and gone, benefits advisers still fully expect the Biden administration to issue a renewed stance at any time criticizing the emerging developments in the world of annuity transfers and threatening new subregulatory guidance.

Advocates such as Rutledge want to ensure that any tweaking regulators do to the 1995 standards be done in public via a notice-and-comment rulemaking process. Interpretive Bulletin 95-1, which laid out the department’s policy, was a subregulatory interpretation of ERISA, and any amendments made wouldn’t necessarily be subject to a thorough public review.

Critics have chastised the department for seemingly trying to subvert its own advisory panel in the lead-up to the congressional report’s drafting. The Labor Department didn’t immediately respond to a Bloomberg Law request for comment.

Consumer advocates are pushing the department hard to revise its guidance to take account of private equity involvement by forcing pensions to conduct more thorough bidding processes or require insurance companies to be more transparent about their finances.

Insurers invest annuity products conservatively, but private investors bet they can do better by funneling retirement dollars into their own accounts or other closely held firms, said Eileen Appelbaum, co-director at the Center for Economic and Policy Research.

It’s an equation that almost always equals higher fees for the consumer, Appelbaum said.

“What we see with the pension funds is that, sure, the funds are doing great, however, if you add the net of what the private equity firm takes out and the net of the management fees, you’re not doing any better than if you had just been in an index fund in the stock market,” she said.