Transfer of Pension Obligation being Challenged

[eytonxav]

Last year Verizon transferred many thousands of management pensions to Prudential. That transfer is now being challenged in court via a class action suit. The outcome will most likely set a precedence for other companies that have also done this or are contemplating such a move:

Lawsuit over Verizon pensions goes class action - Yahoo! Finance

 

[pb4uski]

Interesting. I once worked for GTE which is now Verizon but was not there long enough to vest in the pension plan.

However if I was a Verizon retiree and had a choice of my pension payments being backed by the Verizon pension plan regulated by ERISA and backed by the PBGC or Prudential regulated by insurance regulators and backed by state guaranty funds it would be an easy decision for me - I'd go with Prudential.

 

[Chuckanut]

Interesting. I once worked for GTE which is now Verizon but was not there long enough to vest in the pension plan.

However if I was a Verizon retiree and had a choice of my pension payments being backed by the Verizon pension plan regulated by ERISA and backed by the PBGC or Prudential regulated by insurance regulators and backed by state guaranty funds it would be an easy decision for me - I'd go with Prudential.

+1 (Looks like we agree again!) Especially for those with the higher pension amounts that exceed the ERISA caps.

 

[heeyy_joe]

I wonder...was this move to mitigate the risk to retirees that have pension payouts in excess of ERISA guarantees, to then shift risk equally to all participants?

 

[pb4uski]

+1 (Looks like we agree again!) Especially for those with the higher pension amounts that exceed the ERISA caps.

Twice in one day. Perhaps there is hope for you after all.

 

[pb4uski]

I wonder...was this move to mitigate the risk to retirees that have pension payouts in excess of ERISA guarantees, to then shift risk equally to all participants?

Typically the main impetus of these transactions is to shift the investment risk from the pension plan to the insurer. The insurer is on the hook if the assets backing the annuity liabilities underperform or default.

 

[bob boag]

The uproar over the rumor that my former megacorp might sell its pension fund to an insurer was that there would no longer be a lump sum payout option. A lot of people retired earlier than they otherwise would have to ensure they could get the lump sum payout.

 

[meierlde]

Typically the main impetus of these transactions is to shift the investment risk from the pension plan to the insurer. The insurer is on the hook if the assets backing the annuity liabilities underperform or default.

In part this makes sense because the business of an insurer includes just that finding assets to perform as required. The insurers don't need the banks to do the advising, because since its a core business they have the expertise, while with companies the issue of investing is not a core function.

 

[eytonxav]

I do not know whether the guarantees from an annuity company are universally better than an Erisa covered plan, as it may vary by state. Nevertheless, I suppose that topic may come out in court if indeed, a retiree is protected to the same degree or more under an annuity vs an Erisa plan. Its hard for me to imagine a lawsuit like this moving forward if there was not some basis for it in equity terms, otherwise a big waste of $s. Verizon wanted to get this obligation off their books and not be subject to meeting Erisa funding levels. ATT was in a similar funding situation, but they decided to address the funding and stick with their existing pension plan.

 

[pb4uski]

The uproar over the rumor that my former megacorp might sell its pension fund to an insurer was that there would no longer be a lump sum payout option. A lot of people retired earlier than they otherwise would have to ensure they could get the lump sum payout.

While I haven't followed these transactions very closely, from what I have read the only obligations being transferred are pensions of current retirees where pension benefits are currently being paid.

I'm skeptical that any insurer would assume the liability for a future pension benefits since the future pension benefit payments could be affected by too many things beyond their control like future raises, bonuses, etc. to the employee.

Perhaps they planted that rumor to get people to leave.

 

[heeyy_joe]

Typically the main impetus of these transactions is to shift the investment risk from the pension plan to the insurer. The insurer is on the hook if the assets backing the annuity liabilities underperform or default.

There are always it seems two reasons for the action - a good reason and the real reason.

 

[pb4uski]

There are always it seems two reasons for the action - a good reason and the real reason.

Ah... another conspiracy theorist. Seems that there is one in every crowd.

I suspect you had a point to make but you might try a more direct approach.

 

[heeyy_joe]

Ah... another conspiracy theorist. Seems that there is one in every crowd.

I suspect you had a point to make but you might try a more direct approach.

I think the point that needs to be made in this regard rests with the attorney(s) for the plaintiff(s).

 

[HFWR]

...but they decided to address the funding and stick with their existing pension plan.

What a novel idea...

 

[Felix Mulier]

I do not know whether the guarantees from an annuity company are universally better than an Erisa covered plan, as it may vary by state. Nevertheless, I suppose that topic may come out in court if indeed, a retiree is protected to the same degree or more under an annuity vs an Erisa plan.

ERISA is federal and retirees won't be protected the same way under an annuity. (Who'd a thunk it?)

There is a good article on this topic on the National Retirees Legislative Network (NRLN) website. I get email updates from these guys and they've proven quite useful. They mention GM, Ford, and Verizon who are being "creative" in handling the financial burdens of their pension plans.

Most of us have heard of the PBGC and arrangements for pension plans usually when a corporation files for bankruptcy. These are "Distress Terminations" and are sometimes the BATNA for retirees (vs. losing their pension altogether).

Distress Terminations where the Pension Benefit Guarantee Corporation (PBGC) as the ultimate insurer of defined benefit pension plans ends up paying pension payments, usually less than paid if a plan were not terminated.

But what GM, Ford, and now Verizon are doing falls under "Standard Termination".

In Standard Terminations, plan sponsors are able to reduce future corporate pension plan funding obligations and are able to significantly reduce balance sheet liabilities and thus enhance their ability to borrow funds more cheaply...The NRLN is concerned about the variable latitude that is being taken by companies in what has become known as "de-risking" of pension plans. Or, as one NRLN member has termed it "risk shifting" to retirees.

Basically, this opens up a whole new way to put pensions at risk. NRLN is preparing a white paper to more fully define the appropriate uses of Standard Terminations. It's due out in June.

 

[pb4uski]

....Basically, this opens up a whole new way to put pensions at risk. NRLN is preparing a white paper to more fully define the appropriate uses of Standard Terminations. It's due out in June.

This doesn't make sense. If a plan has a current obligation to pay Mr. Retiree $x per month for life and transfers that obligation to Insurance Company and pays a premium, it seems to me that the pension plan has less risk because it has laid any investment risk on the assets backing that obligation and any mortality risk relating to Mr. Retiree's life expectancy off to the insurer. While I concede that a lot depends on what the plan pays to transfer the obligation to Insurance Company, I think the reality is that companies (and their plans) would prefer to avoid those risks where they can.

The only way such a transaction could create more risk for the pension plan is if the plan paid more for the annuity than they should but given the competitiveness of the annuity marketplace and the expertise of pension consultants advising the pension's trustees, the chance of that should not be high.

 

[eytonxav]

ERISA is federal and retirees won't be protected the same way under an annuity. (Who'd a thunk it?)

Exactly, but if your pension exceeds the maximum guarantee under ERISA, you might be better off with an annuity, but again, that might also depend on any State guarantees associated with the annuity.

I took a lump sum vs a pension from my mega corp back in 2003, as my pension would have been above the ERISA guarantee threshold, and further I didn't trust my former mega-corp to make good on its pension obligation.

 

[Felix Mulier]

...it seems to me that the pension plan has less risk because it has laid any investment risk on the assets backing that obligation and any mortality risk relating to Mr. Retiree's life expectancy off to the insurer. ... I think the reality is that companies (and their plans) would prefer to avoid those risks where they can.

The only way such a transaction could create more risk for the pension plan is if the plan paid more for the annuity than they should but given the competitiveness of the annuity marketplace and the expertise of pension consultants advising the pension's trustees, the chance of that should not be high.

I don't disagree that this is a better thing for the employer's balance sheet. But, as always, some of us are more equal than others. Not all impacted employees at GM, for example, were given a lump sum option. For those that opted for the annuity, or had no say in the matter, there will be no COAs, no protection from ERISA, or PBGC. This from a letter from the GMRA President to the CEO:

Those not eligible for the lump sum offer and all others not offered the choice must accept a third-party annuity and forgo both the protection of ERISA and the PBGC as well as GM’s commitment to fund the plan and any hope for a cost-of- living adjustment.

Auto news | Detroit Free Press | freep.com You can find similar comments from Retiree Associations from Kodak, Ford, and soon Verizon. Each corporation getting more "creative" than the last.

The ill will it's creating among, up until now, their best "feet on the street" advocates (i.e. current and former employees and their families) has yet to take its full toll. This from NRLN President to the GM CEO.

That GM values so little these retirees, who had spent literally millions of years collectively contributing to GM’s past, current, and future successes, and is voluntarily trading that relationship asset for a marginally and temporarily improved financial balance statement appearance… is astounding. The impact of losing the loyalty of GM’s vast retiree population will never be fully measured nor known… but such a loss cannot be beneficial to any organization, especially one locked in a savagely competitive market.

I know the good 'ol days are gone. But IMHO, the corporations who will thrive going forward will be those that have excellent products, excellent customer relationship management, and who treat their employees with decency and respect. It's not that hard.

 

[pb4uski]

WADR, I think that GM employees and retirees should be thankful for what they have. The retirees and employees of just about any other large corporation that went through bankruptcy would probably be in a much poorer position than GM retirees and employees ended up at. Were it not for unprecedented intervention by the federal government they would have much less or possibly nothing. Just saying...

 

[Chuckanut]

Were it not for unprecedented intervention by the federal government they would have much less or possibly nothing.

+1

GM employees are unique in this regard.

 

[Chuckanut]

I still think people should read the book "Retirement Heist" before being so certain they know what is happening to private pensions. It's not always as simple as it seems.

 

[Texas Proud]

WADR, I think that GM employees and retirees should be thankful for what they have. The retirees and employees of just about any other large corporation that went through bankruptcy would probably be in a much poorer position than GM retirees and employees ended up at. Were it not for unprecedented intervention by the federal government they would have much less or possibly nothing. Just saying...

+1 on this... I think that the gvmt gave the unions a lot more than they would have received in a normal BK...

It is not like the old GM is in existence... it is dead.... the company all these people worked at is dead... a new company took over the assets and name and started over...

 

[SumDay]

This was in CFO Magazine earlier this month:

derisking defined-benefit pension plans

These tactics join more-traditional approaches, such as freezing and closing pension plans. Taken together, they constitute a sea change in pension-plan treatment. Just in time, too. “Since the financial crisis reared, there has been this stark realization by large plan sponsors that they have taken on a huge amount of equity risk,” says Evan Inglis, principal and chief actuary at The Vanguard Group. “They have these gigantic pools of assets now creating risks for the shareholders investing in them — risks they are not in business to manage, and risks that shareholders don’t want them to manage.”

 

[eytonxav]

This was in CFO Magazine earlier this month:

derisking defined-benefit pension plans

While I can understand the need for pension reforms, I cannot bring myself to accept the double standard when it comes to executive compensation and benefits vs everyone else. The concept of lead by example is defunct.