Before its bankruptcy in 1991, Executive Life Insurance Company accepted transfer contracts from companies to pay their retirees’ pensions instead of the companies defined benefit pension plan. Employers saved money in the transfer because Executive Life offered high interest rates — which were discovered later to be backed by junk bonds – and because their retirees lost Pension Benefit Guaranty Corporation (PBGC) protection when the companies stopped paying PBGC premiums. Retirees from RJ Reynolds, Pacific Lumber suffered significant cuts in pensions after the value of Executive Life assets plummeted and Executive Life collapsed.

Twenty years after Executive Life defaulted on worker pensions, GM and Verizon helped kickstart a broader trend in corporate America, where over $300 billion in retiree assets have since been offloaded to insurance annuity providers and private equity investors.

In history repeating itself, companies are terminating their pension plans and replacing them with annuities—long-term contracts providing lifetime payments. Recent stock market gains and higher interest rates boost pension assets to make the transfer profitable now. The funded status of many corporate defined benefit plans in the U.S. show surpluses, with a number of pension trackers finding that many corporate plans are more than 100% funded. IBMIBM decided to use its plan surplus to reinstate its defined benefit plan; many more are derisking.

On March 6 Verizon announced it had completed a $5.9 billion transfer of 56,000 pensions to group insurance annuities with Prudential Insurance company and RGA. Last year ATT de-risked their pension obligations in an $8 billion transaction involving 96,000 retirees and beneficiaries.

Workers And Retirees Fighting Back

Both companies assured retirees the shift will not put their pensions at risk. Retirees in both companies are not reassured and are fighting back.

Verizon retirees — BellTel Retirees – are protesting their pension contracts being sold to Prudential Financial Inc. and Reinsurance Group of America Inc. (RGA). Prudential Financial Inc. is heavily dependent on the insurance regulations in Arizona, described by derisking critic attorney Edward Stone as a regulation-light state which does not require reinsurance companies to file publicly available financial statements under Statutory Accounting Principles.

The Communications Workers of America (CWA), the union representing the AT&T and Verizon workers is supporting a lawsuit against AT&T filed last month by affected retirees alleging AT&T violated requirements under ERISA as fiduciaries to act in the best interest of plan participants by selecting the safest available annuity provider.

AT&T’s choice of insurance companies, Athene Annuity and Life, is affiliated with Apollo Global Management, the publicly traded private equity firm co-founded by billionaire Leon Black (who was implicated in the Jeffery Epstein scandal when Apollo Global Management revealed Black had paid Epstein $158 million for financial advice from 2012 through 2017 despite Black knowing Epstein pleaded guilty in 2008 to soliciting sex for pay from an underage Florida girl.)

NBC journalist Gretchen Morgenstern in 2020 raised alarms about Athene’s risky portfolio and Bermuda – based assets in light of its responsibilities for Bristol-Myers Squibb, Dana Corp. and Lockheed Martin Corp retirees pension benefits. Last year the Financial Times covered concerns by others about the risky portfolios of the “shadow” insurance companies.

The ATT suit also accuses State Street Bank, which advised ATT, alleging the independent auditors who had to certify the pension assets are going to a safe entity may have looked the other way. AT&T reported a gain of $363 million in profit as a result of the de-risking transaction and the class action claim estimates that AT&T will receive another $90–180 million in administrative cost savings and $182 million in foregone PBGC premiums over the life of the affected beneficiaries.

De-risking causes other losses besides risk to workers and retirees when a DB pension is terminated. After transfer there is no possibility workers and retirees will get pension improvements like a cost-of-living bump.

In the past when the company would get a surprise gain in their DB plans that went to the workers since the funds were only there for the workers benefits, period. By de-risking the firm can capture all the profits.

De-Risking’s Risks

Total U.S. pension risk transfer (PRT) premium was $12.7 billion in the fourth quarter 2023, 53% higher than fourth quarter 2022. In 2023 850 pension risk transfer contracts were completed: 25% more than in 2022.

DB plans have many advantages over the 401(k) plans — having an annuity for life stands out. With de-risking, that advantage may be over.

For their part, the American Council of Life Insurers’ (ACLI) defends the strength of the insurance companies backing the transfer contracts. Mariana Gomez-Vock, ACLI’s senior vice president of policy and legal, said the Bermuda Monetary Authority has made significant regulatory changes over the last few years meant to reassure regulators across the world that Bermuda has strong regulations reports Remy Samuels at Plan Sponsor.

I taught economics at the University of Notre Dame for 25 years; arriving 20 years after the Studebaker company of South Bend, Indiana, terminated its employee pension plan in 1963 and more than 4,000 auto workers lost nearly all of their promised pension plan benefits with no recourse. As a very young assistant professor I met families still devastated by sudden loss of income—home lost to foreclosure and early death from the stress. The PBGC was put into place specifically citing the Studebaker losses. Pension de-risking could repeat that narrative.

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