The 5^th Circuit Court of Appeals has upheld a lower court that ruled for Verizon Communications Inc. in a case that called into the question the legality of pension annuity buyouts.

The case, Lee v. Verizon, stems from a 2012 pension buyout, which moved $7.5 billion in pension liabilities, or about a quarter of all the communication giant’s obligations, to Prudential Insurance Co.

The annuity purchase affected 41,000 participants in Verizon’s defined benefit plan who had been receiving retirement benefits before January 2010.

Obligations to about 50,000 participants remained on Verizon’s books.

The case was brought by two classes of plaintiffs—one representing the retirees whose obligations were moved to Prudential and the other representing participants whose obligations remained with Verizon.

Verizon paid $8.4 billion for the annuity purchase. In November 2012, plaintiffs filed for an injunction to stop the transaction, but it was denied, and the deal was consummated in December 2012.

The U.S. District Court for the Northern District of Texas certified the two classes—the transferee and non-transferee participants—in March 2013.

The court soon after granted Verizon’s motion to dismiss the claims in June 2013, but it allowed the plaintiffs to amend their complaints, which again were dismissed in April 2014.

At the core of the plaintiffs’ argument was the allegation that the pension annuity transaction was a breach of Verizon’s fiduciary obligations under the Employee Retirement Income Security Act.

The allegation was found to lack merit by both the lower and the 5^th Circuit courts.

“ERISA and related regulations authorize annuity purchases, and do not prohibit such purchases during an ongoing plan,” according to the ruling on appeal. The three judge appellate panel ruled unanimously for Verizon.

The court noted that the Department of Labor has defined terms for how sponsors can de-risk pension liabilities. Transferring obligations to insurance companies via annuity purchases is one of them, according to court documents.

The DOL lays out three conditions that make the annuity transfers allowable:

Participants’ benefits must be guaranteed by the insurance company.
That guarantee must be enforceable.
Participants must be issued notice of the benefits they are entitled to under the annuity transfer.

Plaintiffs also alleged that Verizon’s failure to get consent prior to the annuity purchase was a fiduciary breech.

But ERISA “contains no such requirement for consent, either in the provisions detailing fiduciary duties, or in the provisions governing ERISA-compliant annuity purchases,” according to the appellate decision.

The plaintiffs also claimed that the $8.4 billion Verizon paid for the annuity—$1 billion more than the $7.4 billion in liabilities transferred—breached ERISA’s requirement that plan assets be used for the exclusive benefit of participants.

“The extra $1 billion payment was used to pay Verizon’s obligations for third-party costs related to the annuity transaction, including fees paid to outside lawyers, accountants, actuaries, financial consultants and brokers,” argued the plaintiffs.

“Those expenses and fees should have been charged to Verizon’s corporate operating revenues,” and not charged to the pension plan, they claimed.

But a DOL advisory opinion clearly states that “reasonable expenses” incurred by implementing the annuity transfer can be paid by plan assets.

Both the lower and appellate courts ruled that the plaintiffs failed to prove that the $1 billion cost of the transfer was unreasonable.

Plaintiffs also claimed further fiduciary breach because Verizon only used one insurance company, as spreading the pension assets among several insurers would have been more prudent.

But that claim was dismissed on the grounds that Fiduciary Counselors Inc., the consultancy hired by Verizon as an independent fiduciary to negotiate the selection of the annuity provider and the terms of the purchase, adequately executed its fiduciary obligations to vet the deal.

Instant Insights /

5th Circuit confirms Verizon de-risking did not violate ERISA

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