Lawsuit highlights a potential difficulty for pension risk transfer

Share

One of the largest pension risk transfer transactions on record has hit a stumbling block just prior to the deals completion. The $7.5 billion transaction would see Verizon Communications transferring $7.5 billion of the Verizon Management Pension Plan obligations to insurer Prudential. It’s a group annuity deal, where Verizon buys the annuity contract from Prudential who then take over responsibility for making payments to the approximately 41,000 included retirees.

The deal which was scheduled to clear this week we believe has hit a stumbling block when two Verizon retirees filed a lawsuit seeking to block the transaction. They claim that when the pension liabilities transfer over to Prudential the retirees lose some of the protection afforded by U.S. government backed initiatives such as the Employee Retirement Income Security Act (ERISA) and Pension Benefit Guaranty Corporation (PBGC). Instead as annuity holders the retirees will be protected by insurance guaranty regulations which can vary on a state by state basis.

Verizon claims that those protections are on a par, but those filing the lawsuit claim that their protection is reduced. By losing federal backing they feel that if Prudential themselves were to fail then the retirees would be protected by the state coverage, which is insufficient in some states it is claimed. The lawsuit parties need to file briefs with the Dallas court by the 6th December after which a decision will be taken on whether to allow the deal to close or not.

We usually cover the longevity swap and longevity risk transfer aspects of pension risk transfers, not pure annuitisation deals such as this, however this does show a potential difficulty that other pension and longevity risk transfer deals may have to overcome in future. The lawsuit points out that while Prudential is a large and safe financial institution, some of the retirees are in their early 70’s and may have twenty years or more during which Prudential are responsible for making their pension payments. The fact that the retirees are removed from federal protection is the crux of this lawsuit but it is easy to see how similar arguments could be filed over longevity swap type risk transfer deals as well. It highlights that retirees included in these deals need to receive visible continuity in protection even when the responsibility for paying their pensions is transferred to someone else.

More details can be found in this article on AI CIO.

Details on the transaction can be found in this press release from Prudential.

Print Friendly, PDF & Email

Artemis Newsletters and Email Alerts

Receive a regular weekly email newsletter update containing all the top news stories, deals and event information

  • This field is for validation purposes and should be left unchanged.

Receive alert notifications by email for every article from Artemis as it gets published.

Read previous post:
Post-Sandy secondary cat bond price recovery slows down

The post-Sandy rebound in secondary catastrophe bond prices slowed in the last week. After a healthy bounce of over 1.3%...

Close