- De-risking Pension Liability - First-Round of Legal Battle Goes to Verizon
- July 3, 2013 | Authors: Jonathan A. Kenter; Adam M. Meehan
- Law Firms: Troutman Sanders LLP - New York Office ; Troutman Sanders LLP - Atlanta Office
A federal district court in Texas dismissed a certified class action lawsuit brought by approximately 91,000 Verizon retirees, participants and beneficiaries claiming breaches of fiduciary duty in the purchase of a single premium group annuity contract from Prudential Insurance Company of America to cover the liability of those retirees who began receiving pension payments under the Verizon Management Pension Plan prior to 2010. Verizon bought the annuity in order to rid the plan and itself of approximately $7.4 billion in pension liabilities in a move commonly referred to as de-risking. As a result of the annuity purchase, the retirees are no longer participants in the plan, no longer have ERISA protections and rights, and lose the pension protection offered by the Pension Benefit Guaranty Corporation.
The retirees claimed that Verizon violated its fiduciary duties under ERISA, among other claims involving protected rights under ERISA. In order for the ERISA fiduciary duties to apply, the actions taken must be considered fiduciary functions. Generally, decisions of a plan sponsor to modify, amend or terminate a plan are excluded from fiduciary responsibility. The district court found that Verizon did not engage in a fiduciary function when it amended the plan to direct the purchase of the annuity.
The district court considered the “implementation” of an amendment to be a fiduciary function. Here, the retirees contended that Verizon violated the exclusive benefit rule within ERISA - the fiduciary must discharge duties with respect to the plan for the exclusive benefit of the participants and their beneficiaries - by causing the plan to pay $1 billion more than the liabilities of the plan. The district court seemed unfazed by the large monetary amount and dismissed the retirees claim as merely an “allegation” of unreasonableness without showing why it was unreasonable. Similarly, the district court upheld Verizon’s decision to select a “lone insurer” and consummate the transaction when the plan was less than 80% funded, holding that the retirees did not properly allege a breach of a fiduciary duty.
Takeaways for Plan Sponsors
This legal battle could lay the groundwork for plan sponsors wishing to follow Verizon’s example in de-risking their pension liabilities. The district court’s decision affirmed that the principal action involved (e.g., amending a plan to provide for an annuity purchase) is outside the scope of fiduciary conduct. It also recognized that the implementation of an authorizing amendment (e.g., selecting an annuity provider) is considered a fiduciary function, thus putting plan sponsors on notice that any effort to de-risk could be reviewed for prudence in its implementation. In this respect, the retirees were given leave by the court to re-plead certain aspects of their case. Stay tuned. Troutman Sanders employee benefits attorneys will continue to monitor the proceedings and keep you informed as this case works its way through the courts.