New Challenges to Pension Risk Transfers


Plan sponsors have found it increasingly difficult to predict and manage the cost of their defined benefit pension plans (“DB plans”) due to fluc­tuating interest rates, investment returns, increased costs, and participant longevity. As a result, pension de-risking has become a common way for plan sponsors to manage risk and control costs associated with their DB plans. Pension de-risking transactions take several forms, including paying lump sums to participants in a limited window and restructuring the underlying plan investments to reduce risk. Another strategy for de-risking, which has become increasingly popular, involves transferring plan liabilities to an insurance company. In these transactions, plan sponsors purchase annuity contracts from third-party insurers who then assume responsibility for future benefit payments to participants and beneficiaries covered by the transaction. We refer to these transactions as pension risk transfers. 

Three class action complaints filed in March reveal that the plaintiffs’ bar views pension risk transfers as an area of significant liability for sponsors of DB plans. The lawsuits, Konya v. Lockheed Martin, Piercey v. AT&T and Schloss v. AT&T, potentially signal a new area of litigation in an environment where plan sponsors are increasingly interested in transferring pension risk. The plaintiffs bringing these lawsuits all decry the selection of a specific annuity provider, Athene Annuity & Life Assurance Company of New York (“Athene”), as the fiduciary’s wrongdoing. The three lawsuits concern risk transfers involving billions of dollars of pension liability, impacting over 100,000 participants and beneficiaries.

Selection of Annuity Provider

By way of background, while the decision of whether to engage in a pension risk transfer is a settlor decision (carrying with it no fiduciary liability), courts have long recognized that selection and monitoring of service pro­viders is a fiduciary function that must be carried out with the highest duties of prudence and loyalty. This includes selection of an annuity provider and the selection of the fiduciaries or consultants who recommend or select the annuity provider. 

In Intrepretive Bulletin 95-1, the Department of Labor (DOL) provides guidance on the fiduciary standards for selecting an annuity provider. Under this sub-regulatory guidance, plan fiduciaries must select the “safest annuity available” and evaluate the insurer’s claims paying ability and creditworthiness by considering six factors: (1) the annuity provider’s investment portfolio quality and diversification; (2) the size of the insurer relative to the proposed contract; (3) the level of the insurer’s capital and surplus; (4) the insurer’s exposure to liability; (5) the structure of the annuity contract and guarantees supporting the annuity; and (6) the availability of additional protection through state guaranty associations. 

In the SECURE Act of 2022, Congress directed the DOL to review and determine whether amend­ments to Interpretive Bulletin 95-1 are warranted, and to report its findings to Congress. The DOL’s recom­menda­tions were due by the end of 2023, but to date have not been made public. 

The safest available annuity guidelines are a critical com­­ponent to the claims made by the plaintiffs’ attorneys in the class action lawsuits and further emphasize the need for the DOL to consider whether updates to Inter­pretive Bulletin 95-1 are needed. 

Class Action Lawsuits

While there is some variation in the complaints, the core allegations against AT&T and Lockheed are that the selection of Athene as an annuity provider was a breach of fiduciary duty and that the transfers were prohibited transactions. The plaintiffs claim the defendants failed to conduct a “sufficiently independent and objective evaluation of available annuity providers” when selecting Athene. 

Each of the complaints asserts that the defendants breached their fiduciary duties because Athene is “not the safest available” annuity provider. The plaintiffs also allege a significant risk of “insurance failure,” and illustrate this point with the collapse of the A+ rated Executive Life Insurance Company in the early 1990s, when its portfolio cratered amid a bond market meltdown. The plaintiffs go to great lengths to describe Athene as an unsafe annuity provider with a high risk of insolvency relative to other more traditional insurance companies. The plaintiffs point out that since its inception in 2009, Athene has completed 45 pension risk transfer transactions totaling $50.5 billion and covering over 550,000 plan participants. The plaintiffs describe Athene as a “private equity–controlled insurance company with a highly risky offshore structure,” adding that, as such, Athene has a corporate culture that is antithetical to the interests of policyholders. The plaintiffs allege that Athene invests in lower quality, higher risk assets, specifically collateralized loan obligations, sub­ordinated debt, and asset-backed securities, among others. 

The plaintiffs assert that the selection of Athene was a prohibited transaction based on the allegation that the defendants were disloyal in the selection of Athene; and further, that the defendants received an economic benefit in Athene’s selection through reduced premium payments rel­ative to what the defendants would have paid elsewhere (without providing any comparative data to support that choice). 

In the two complaints against AT&T, the plaintiffs also allege self-dealing by State Street Global Advisors, the independent fiduciary advising AT&T on the insurer selection process, based on its investments in both AT&T and Athene’s parent company, Apollo. Thus, they claim, the transactions were with a party in interest and at substantial risk to participants and beneficiaries. 

With other lawsuits challenging fiduciary selection of service providers, the courts have focused on whether fiduciaries have reached a selection outcome through a prudent, deliberative process. Notably, there are, at most, only conclusory allegations about the process the defendants engaged in to select Athene and no information about what the bids of other candidates were. 

The plaintiffs also attack pension risk transfers generally by noting that, with the transaction, the affected part­icipants and beneficiaries lost both ERISA Title I and PBGC protections. This is because, after the transfer, the defendants no longer guarantee the pension benefits covered by the transaction, and benefits are protected only by state guaranty associations. The plaintiffs complain that state guaranty associations are subject to state law limits (rather than one standard limit defined by PBGC) that could “easily” be exhausted by a pensioner.

The plaintiffs seek a disgorgement of profits earned from the allegedly unlawful transaction, and a guarantee of benefits, either through the selection of other “reliable” insurers using appropriate procedures, or through the posting of security. 

Practical Considerations 

The defendants in these cases have not yet responded to the complaints, and thus the courts have not ruled on whether these claims will continue past the pleading stage. It also remains to be seen how federal regulators will view annuity provider selection, as we wait for the DOL’s report on whether to update its 1995 guidance. 

Given the attention from the plaintiffs’ bar to this area and the uncertainty of whether these arguments will gain traction with the courts, plan sponsors considering a pension risk transfer strategy should work with their professional advisers to monitor developments in these cases and, importantly, undertake a well-documented and prudent process when selecting an annuity provider. Plan sponsors should also carefully consider whether to engage a qualified and independent consultant to review potential candidates and recommend insurers that meet the safest available annuity standard.