GE Pension Threats Show Peril of Transfers to Insurers, Spinoffs

The former General Electric Co. and its spinoffs are reckoning with legal threats from participants across pensions the companies sponsor, in a preview of dangers other employers stand to encounter as they restructure or de-risk, offloading benefit obligations to subsidiaries or insurers.

Pension risk transfers to annuity providers present different concerns for participants than the shifting of pension responsibilities to a spinoff, but both are possibilities, particularly when a company sponsoring a pension is splintering or reorganizing to stave off financial troubles, as GE did in April.

Both qualified benefit plans under the Employee Retirement Income Security Act and non-qualified “top hat plans” have become legal targets for workers looking to establish or preserve pension benefits as the original plan sponsor offloads them.

Participants in the non-qualified GE Supplementary Pension Plan, known as a “top hat plan” because it is geared toward executive-level employees, reached an administrative agreement outside of court on Aug. 1, to protect their right to sue if spun-off entities GE HealthCare and GE Vernova fail to pay their full retirement benefits.

“There’s just heightened scrutiny around ensuring payment of pension benefits in general, and probably what triggered some of the scrutiny here was GE saying, ‘now we’re going to transfer this to these other plans and then we’ll have no further obligations,’ ” said Ada Dolph, partner at Seyfarth Shaw LLP.

On July 1, GE Aerospace was hit with aproposed class action in New York federal court alleging that when it was operating as GE in 2020, it violated federal benefits law by de-risking more than $1.7 billion in pension obligations with controversial insurer Athene Holding Ltd. The move diminished the value of plan holders’ assets and upped the risk that participants wouldn’t receive their benefits, GE retirees said.

Offloaded to Annuities

Pension risk transfers into annuities remove some legal protections and fiduciary obligations that plan sponsors held when the plan’s assets were covered by ERISA. But, insurers also have funding obligations and applicable laws to backstop their handling of pension assets, according to benefits lawyers.

“It’s a much more secure transfer of the benefits, because it’s backed by a significant amount of cash with a company whose job it is to pay those benefits, and has to do quite a bit of disclosure and reporting regarding their investments,” Dolph said.

More companies are choosing to utilize pension risk transfers, with LIMRA reporting that 146 contracts worth $14.6 billion had broken a first-quarter record this year, including transactions by Verizon Communications Inc. and Shell USA. This is a 26% increase over the first quarter of 2023, LIMRA said in a statement.

Companies de-risking with Athene have been the subject of heightened legal scrutiny, including plan sponsors AT&T Inc., Alcoa USA Corp., and Lockheed Martin Corp. The GE suit highlighted Athene’s allegedly risky offshore structure, arguing that it jeopardizes workers’ ability to collect benefits without compensating them for the additional risks they take on after the transfer.

After an employer completes a pension risk transfer to an insurer, participants lose coverage from the Pension Benefit Guaranty Corporation as well as ERISA protections, which are swapped out for a different set of standards imposed upon annuities, said Kent Mason, partner at Davis & Harman LLP.

But this may not be consequential.

Athene and other annuity providers are relatively secure because state insurance laws require that they be more than 100% funded, meaning that a transfer from any pension plan to an annuity policy often means an increase in funding and the security that accompanies it, according to David Godofsky, partner at Alston & Bird LLP.

“No annuitant has lost anything in the last 30-plus years, whereas PBGC did a 25-year study of 500 plans and found that participants had lost, because of the PBGC limits, $8.5 billion total,” Mason said.

A 2023 American Benefits Council study found there were no instances in which promised pension benefits from an annuity buy-out contract weren’t ultimately provided to participants, even when insurance companies became insolvent or experienced financial difficulties.

Between 1988 and 2012, however, the PBGC found that its three primary guarantee limitations reduced benefits for 16% of all vested participants across those 500 plans, averaging over $45,000 per impacted participant, according to the study.

Hold Onto Your ‘Top Hat’

Like GE, corporations including Motorola Inc., General Motors Company, and DuPont de Nemours Inc. have also conducted similar spinoffs, transferring pension obligations to the remaining companies. In many instances, these transfers have prompted class action litigation over benefits and fiduciary breaches.

“If you’re spinning off a pension plan to another pension plan, it’s going to be backstopped by a smaller company,” Godofsky said. “But a smaller company doesn’t necessarily mean a less secure company.”

The spinoffs that sponsor pension plans after a transfer, which are often refashioned subsidiaries of a former parent, are subject to the same ERISA standards as the original employer sponsoring the pension before it was passed along.

Concerns that the spun-off company will itself go out of business, or choose to conduct its own pension risk transfer that removes ERISA protections, have prompted participants to seek assurance of the legal protections, as in GE’s case.

Spinoffs involving large pensions that cover thousands of employees make for easier litigation targets than more niche supplemental plans for executives, with plaintiffs’ side firms often using advertisements to educate rank-and-file pension participants that they have an opportunity to lead prospective class action suits against their employers.

Nonqualified pensions, including the GE Supplementary Pension Plan, are mostly for executives and guaranteed only by the company itself, lacking the same statutory and PBGC protections as qualified plans, according to benefits lawyers.

“At the outset, GE basically announced that it was washing its hands of the plan once it would be transferred to these two subsidiaries, and it could do that because there was no sort of fiduciary obligation around the transfer, which is consistent with the pension risk transfer cases,” Dolph said. “If you contrast that to the pension risk transfer cases, those are plans that have a lot of benefits value in them and plan assets are used to purchase an annuity, so there’s all this cash backing up the plan.”

GE’s “top hat plan” put participants in a position to rely only on the sponsor’s promise to pay their benefits, meaning more of pension savers’ money is at risk in this type of structure. The participants in that plan secured their rights to sue GE and the subsidiaries.

The GE retirees’ agreement also accounts for potential pension de-risking scenarios, allowing participants to sue in the event that a third-party insurer is unable to pay their benefits.

“The employees are concerned that the company being spun off is not as secure as the company it’s being spun off from, and in many cases these non-qualified plans are a very substantial portion of the executives’ net worth,” Godofsky said. “Maybe the executives shouldn’t have had so much of their net worth tied up in one company, but they do.”