The 5th Circuit Court of Appeals has upheld a lowercourt that ruled for Verizon Communications Inc. in a case thatcalled into the question the legality of pension annuitybuyouts.

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

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The annuity purchase affected 41,000 participants in Verizon’sdefined benefit plan who had been receiving retirement benefitsbefore January 2010.

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

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

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Verizon paid $8.4 billion for the annuity purchase. In November2012, plaintiffs filed for an injunction to stop the transaction,but it was denied, and the deal was consummated in December2012.

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The U.S. District Court for the Northern District ofTexas certified the two classes—the transferee andnon-transferee participants—in March 2013.

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

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At the core of the plaintiffs’ argument was the allegation thatthe pension annuity transaction was a breach of Verizon’sfiduciary obligations under theEmployee Retirement Income Security Act.

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The allegation was found to lack merit by both the lower and the5th Circuit courts.

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“ERISA and related regulations authorize annuity purchases, anddo not prohibit such purchases during an ongoing plan,” accordingto the ruling on appeal. The three judge appellate panel ruledunanimously for Verizon.

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

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The DOL lays out three conditions that make the annuitytransfers allowable:

  1. Participants’ benefits must be guaranteed by the insurancecompany.

  2. That guarantee must be enforceable.

  3. Participants must be issued notice of the benefits they areentitled to under the annuity transfer.

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

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

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The plaintiffs also claimed that the $8.4 billion Verizon paidfor the annuity—$1 billion more than the $7.4 billion inliabilities transferred—breached ERISA’s requirement that planassets be used for the exclusive benefit of participants.

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

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

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

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Both the lower and appellate courts ruled that the plaintiffsfailed to prove that the $1 billion cost of the transfer wasunreasonable.

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

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But that claim was dismissed on the grounds that FiduciaryCounselors Inc., the consultancy hired by Verizon as an independentfiduciary to negotiate the selection of the annuity provider andthe terms of the purchase, adequately executed its fiduciaryobligations to vet the deal.

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Nick Thornton

Nick Thornton is a financial writer covering retirement and health care issues for BenefitsPRO and ALM Media. He greatly enjoys learning from the vast minds in the legal, academic, advisory and money management communities when covering the retirement space. He's also written on international marketing trends, financial institution risk management, defense and energy issues, the restaurant industry in New York City, surfing, cigars, rum, travel, and fishing. When not writing, he's pushing into some land or water.