Harm from de-risking?

[My 2 cents]

In today's BenefitsLink Retirement Plans Newsletter, there is an article on the assertions being made by the Verizon retirees who have been fighting against the de-risking transaction under which annuities were purchased for their benefits from a large, secure insurance company, to reduce the size of the Verizon plan. If I understand it correctly, there were two areas in which the assertion of harm is being made:

1. The annuities are not considered as secure as continued coverage by the PBGC.

2. The annuities, no longer being paid from an ERISA plan, do not provide the same degree of protection from creditors in the event of personal bankruptcy.

In thinking that both are entirely wrong, am I missing something? I just don't understand why the lawsuit is not considered frivolous. As I understand it, the plaintiffs are the people for whom annuities were purchased, not those left behind.

1. Considering especially the self-declared tenuousness of the PBGC's finances, wouldn't proper fiduciary care have resulted in the selection of an unquestionably strong insurer at least as capable of standing behind the benefit promise as the PBGC, and even if things were to turn sour in the future for that insurer, wouldn't the state guaranty associations substantially reduce the risk to the retirees (or are we contemplating some sort of asteroid-strike-sized economic calamity, in which case would the PBGC survive)?

2. I am not a lawyer, but surely any annuity purchased to settle benefit rights under an ERISA pension plan would have to provide the same iron-clad protection against creditors as would arise were the benefit obligation still under the pension plan, wouldn't it? Despite the assertions in the article, wouldn't the purchased annuities still be covered by ERISA?

If the plan sponsor decided to terminate the plan outright (an act by the sponsor which presumably cannot be legitimately challenged by the participants if not covered as a result of collective bargaining), when considering just those for whom annuities were purchased in the de-risking transaction, when the termination was completed and annuities were purchased for the retirees, how would they be any better off than they are under the de-risking transaction? Certainly, if annuities are to be purchased for retirees in pay status as part of a full plan termination, the retirees have no right to demand a lump sum payment instead! In nearly every plan termination of a defined benefit plan, the current retirees are given no choices. An insurer is selected and those in pay status are taken care of by an annuity purchased from that insurer.

[MoJo]

Just my two cents worth here....

1) Yes, but to play devil's advocate here, Mutual Benefit (a life insurance company) was rated at the top of the heap in the "Best Ratings" the DAY BEFORE they went belly up. The case at hand involves Prudential, and in all honesty, I can't see a problem with their solvency - but one never knows what the future will bring (which actually bodes well fro the defendants in the suit - as the plaintiff's case is "speculative), but things do happen. Principal (another well capitalized insurer) not that many years ago suspended withdrawals from a real-estate investment fund (and I don't know if it was an NAV product or an insured product) - but they suffered a liquidity issue that caused pain and suffering to many participants (mostly, if not all, in DC plans). Just sayin.....

Bottom line is, selection of Pru was a fiduciary decision. I assume Verizon exercised their obligations as a fiduciary with all due prudence. The case is making the argument that they didn't (arguably because they could never do so by removing the assets from a "qualified" plan and turning them over to a for-profit insurance company - OUTSIDE of the plan (which didn't terminate - an important distinction here).

2) The difference between ERISA's anti-alienation provisions and a contractual anti-alienation provision is an important distinction. ERISA will not allow ANYONE (with the exceptions of a spouse or ex-spouse and kids, and in some limited circumstances, the IRS) to cause the benefit to be assigned. In other words, no court (except in the case of a QDRO) can order a plan or it's fiduciaries to pay anyone other than the participant or beneficiary. Once the money is received by the participant or the beneficiary, someone can levy against the account it lands in, but until "the check is cashed" there is nothing a creditor can do to nab the cash - and debtor participants can be real tricky in finding new and unique places to literally "cash" a check without it ever hitting a bank account. With respect to an annuity, the provision is contractual, and is SUBJECT TO STATE LAW GARNISHMENT PROVISIONS. So while the contract may not allow the benefit to be "accelerated" to pay a creditor, and will not allow the participant to assign the benefit to another, because it is an "income stream" payable to a debtor (participant), state law may allow a garnishment to be taken from it BEFORE it lands in the participants account.

I'm not well versed in every state's garnishment/attachment provisions, but it is indeed a risk to the participants that did not exist when the assets were still in plan.

[My 2 cents]

Just my two cents worth here....

1) Yes, but to play devil's advocate here, Mutual Benefit (a life insurance company) was rated at the top of the heap in the "Best Ratings" the DAY BEFORE they went belly up. The case at hand involves Prudential, and in all honesty, I can't see a problem with their solvency - but one never knows what the future will bring (which actually bodes well fro the defendants in the suit - as the plaintiff's case is "speculative), but things do happen. Principal (another well capitalized insurer) not that many years ago suspended withdrawals from a real-estate investment fund (and I don't know if it was an NAV product or an insured product) - but they suffered a liquidity issue that caused pain and suffering to many participants (mostly, if not all, in DC plans). Just sayin.....

Bottom line is, selection of Pru was a fiduciary decision. I assume Verizon exercised their obligations as a fiduciary with all due prudence. The case is making the argument that they didn't (arguably because they could never do so by removing the assets from a "qualified" plan and turning them over to a for-profit insurance company - OUTSIDE of the plan (which didn't terminate - an important distinction here).

2) The difference between ERISA's anti-alienation provisions and a contractual anti-alienation provision is an important distinction. ERISA will not allow ANYONE (with the exceptions of a spouse or ex-spouse and kids, and in some limited circumstances, the IRS) to cause the benefit to be assigned. In other words, no court (except in the case of a QDRO) can order a plan or it's fiduciaries to pay anyone other than the participant or beneficiary. Once the money is received by the participant or the beneficiary, someone can levy against the account it lands in, but until "the check is cashed" there is nothing a creditor can do to nab the cash - and debtor participants can be real tricky in finding new and unique places to literally "cash" a check without it ever hitting a bank account. With respect to an annuity, the provision is contractual, and is SUBJECT TO STATE LAW GARNISHMENT PROVISIONS. So while the contract may not allow the benefit to be "accelerated" to pay a creditor, and will not allow the participant to assign the benefit to another, because it is an "income stream" payable to a debtor (participant), state law may allow a garnishment to be taken from it BEFORE it lands in the participants account.

I'm not well versed in every state's garnishment/attachment provisions, but it is indeed a risk to the participants that did not exist when the assets were still in plan.

Real estate trusts with liquidity issues do not strike at the security of insurance companies that made the investment available. The insurer, if the legal documents and sales methods are handled properly, with proper warnings about the potential for illiquidity, could never be called upon to pay anything to those who could not get their money out. The lack of the real estate trust's liquidity should have nothing to do with the financial condition of the sponsoring insurer.

Mutual Benefit (taken over in 1991) is ancient history! Back then, top ratings turned out to be inadequate indicators. Aren't the ratings agencies (assuming there are still ratings agencies) more careful in their analyses these days? And Wikipedia says all of their policyholders were made whole. That sort of thing is why I think that the plaintiffs' claims about losing security do not hold up. Other insurance companies would necessarily step in to cover the losses were the big, secure company from whom the annuities were purchased ran into financial difficulties.

Concerning your second point, do state garnishment laws apply to annuities purchased when a plan terminates? Are annuities purchased to settle ERISA plan liabilities not accorded treatment as still subject to federal jurisdiction since all benefits and rights under the plan must be protected? Why would there be any distinction at all between annuities purchased by a non-terminating plan and those purchased by a terminating plan?

[MoJo]

With respect to the real estate fund - it was an "example" of a liquidity issue that can occur. By the way, the largest sector in many insurance company portfolios (the "general account" which provides the guarantee of an insured product - like an annuity) - is REAL ESTATE. Generally, it's hard to ascertain the value of the guarantee as the underlying portfolio is usually not disclosed publicly, and in reality, on a "fraction" of the insured exposure need be backed by the reserves. Bottom line, it's a "risk" that ERISA attempted to deal with by the fiduciary obligations that protect participants in a qualified plan. And by the way, the comparison to a "terminated" plan is inappropriate. When a plan TERMINATES, the fiduciary obligation vanish after the distribution of the assets. In a de-risking situation, the fiduciary obligations continue for those not kicked out of the plan via the de-risking transaction. Think of it this way - a participant who is in a plan (and can't be forced out because of the size of the benefit) can essentially stay in the plan forever (subject to RMD issues) and be protected. Here, that choice was removed from the participants - and that increases their risk. Measurable or actionable? That's up to the court.

Mutual Benefit is ancient history? Prove to me the current rating metrics are any better. The problem is, we don't know if there is a problem until another Mutual Benefit occurs. Look at S&P and the other bond rating agencies. They blew up - and in S&P's case they are barred from certain rating activities for a year and have a fine to pay. Other will meet the same fate, I'm sure. You don't know the value of the rating until it fails - and with most ratings (bonds, insurance companies, etc., it's all "proprietary" and not readily testable until one company fails).

With respect to garnishments of annuities post plan termination, the rules would be the same whether the plan continues or terminates and NO, the annuity purchased in settlement of an ERISA plan obligation is not afforded the same protections of the plan itself. ERISA does not apply to an asset "distributed" out of hte plan, regardless of whether it originated with ERISA funds or not - Keep in mind that a plan termination extinguishes the fiduciary obligations - under law - and that creates a different scenario from the one where a fiduciaries chooses to remove the obligation from the plan while the plan continues. Essentially, in a termination scenario, the fiduciary treats every plan participant essentially the same, until te fiduciary obligation ends (assets fully distirbuted). In de-risking, the fiduciary has cut loose a group of participants and made the payment of their benefit subject to the fortunes of the insurance company.

You know, and I'm not sure this isn't what some companies do, and that is to secure the benefits by having the PLAN purchase the annuities and hold them as PLAN assets. In that case, the liability is secured to the same extent that the taking the liability off book would (same insurance company, etc.) but the plan remains the primary provider of the benefits. I understand that there may be some issues with funding the plan to the extent necessary to accomplish this, but that solves the issues raised by the participants in this case.

Also, keep in mind, I have no idea whether the plaintiffs will be successful here. Actually, I doubt it - but the issues they raise are those that probably require a full adjudication to resolve. That is, what is the effect of the de-risking on the participants, and did Verizon do it's job correctly.

[mbozek]

The law suit by VZ employees against de risking is the last gasp by Participants who are covered by DB retirement plans to preserve an obsolete, inefficient and costly retirement plan business model which modern corp can no longer afford. Their complaints lacks merit for the following reasons.

1. Derisking of liabilities by purchasing annuities is permitted by ERISA and has been going on for over 30 years. I worked on an annuity purchase for a fortune 100 Co 25 years ago where the liability for paying retirement benefits was shifted to a NY regulated insurer. There is a DOL regulation on the criteria for purchasing annuities.

2. Sponsors have valid business reasons for de risking including saving the PBGC annual per participant premium which can add up to thousands of dollars, lowering cost of future benefit liability due to increasing longevity and lower return on investments and administrative costs.

3. While large insurers such as MBL have failed the frequency is rate is low. MBL was the 18th largest LI insurer when it failed in 1991. However it was taken over by the NJ insurance department and rehabilitated so that in 2000 it was restored to solvency after all of the bad RE investments were sold. Annuity owners did not lose any of their investments and received interest on their annuity contracts during rehabilitation although it was a lower rate than rate guaranteed by MBL.

4. Pru is more heavily regulated for solvency than MBL because in addition to the NJ Insurance dept it has been designated under Dodd Frank by the financial stability oversight council as a systemically risky financial institution regulated by the Federal Reserve which requires higher capital requirements and review by the Fed. Other non bank entities regulated by the fed are AIG, GE capital and Met LIfe.

5. Many state insurance laws protect annuities and LI proceeds from creditors claims which are comparable to the protection available under ERISA. According to one survey there is no creditor protection in CO, MA, MT, NH, VA and WV. Annuity owner can always establish an irrevocable trust to protect assets. Some laws may protect the annuity benefits from creditors even after they have been deposited in the annuitants bank account. Need to review state protection of annuity benefits.

6. The belief that greater protection of the annuity benefits is available under the PBGC is misplaced. PBGC single employer trust fund has an unfunded liability of about $20B and unlike the FDIC there is no guarantee of a shortfall by the US treasury because the PBGC is an off budget agency. Last year Congress refused to guarantee the benefits insured by the multi employer trust fund run by the PBGC against a shortfall in assets needed to pay benefits and permitted plans that are underfunded to reduce accrued benefits which had already been earned in prior years. Congress is not going to guarantee any shortfall in the PBGC single employer fund so as to prevent a reduction in benefits of plan participants. PBGC estimates that it needs about a 4% net return each year to fully fund all benefits currently guaranteed.

[MoJo]

mbozek said: The law suit by VZ employees against de risking is the last gasp by Participants who are covered by DB retirement plans to preserve an obsolete, inefficient and costly retirement plan business model which modern corp can no longer afford. Their complaints lacks merit for the following reasons.

You know, I would love to refute your points one by one, but 1) your premise is so inherently biased, it colors what follows ("obsolete, inefficient and costly" - is an assumption, not proven by any means by the data); and 2) you make certain assumptions about things like the solvency of Pru vs. the PBGC - which, in a legal sense is totally irrelevant to the proceedings. If and when the claims have to be paid is the only point in time that the solvency of the respective entities is relevant to the participants - but it still has no relevance to the legal issues involved; and 3) you ignore the fact that this is a proceeding on the basis of whether 1) the ERISA protections (which involve not only those afforded by the PBGC are worth anything and the protections of the anti-alienation provisions of IRC Section 401(a)(13), but also those provided by the employer and the various fiduciaries of the plan); and 2) whether those fiduciaries complied with their obligations in making the decisions they did (and indeed, if they even had an obligation with respect to these issues).

I am in no way arguing that the plaintiffs in this case will prevail and certainly businesses have legitimate "business" reasons (which often conflict with "law") to de-risk (but they also have ERISA obligations to the extent that they have CHOSEN to sponsor a plan in the first place) - but I don't see it as a "last ditch effort" by them. The fact that de-risking has been going on for quite some time doesn't mean that the issues raised here are worthy of court review. Plaintiff's' will have to demonstrate that their case has merit (which thus far they seem to have made it past a hurdle or two in the preliminary stages of this litigation) and Verizon will have to defend it's actions. It's exactly this kind of matter that our Founders envisioned when they create a government with an independent judiciary....

[ESOP Guy]

Does anyone really believe the government won't bailout the PBGC when the time comes?

Back in the '80s everyone one of my finance prof said the same thing. Legally Freddie and Fanny were not guarantee by the government but their bonds sell like their is an implied government guarantee.

The market was right and the lawyers who said there was no legal obligation were wrong. The government couldn't afford to allow the repercussions of Freddie and Fanny going under. The market saw the political reality.

The simple fact is if the PBGC defaults you are going to have the news showing you pictures of retirees many of whom took pension cuts because the PBGC payment cap now being told they might get little or nothing more from the PBGC and congress will fold and vote the funds to pay those people.

So if you were to ask me about the pension I have earned at a former employers: Which would you prefer PBGC protection or the idea Pru won't go insolvent I would pick PBGC every time.

Don't get me wrong. Nothing I am saying here makes me believe these people have a case for court or if my former employer de-risked I would be up in arms over getting a Pru annuity. I think the odds of Pru going insolvent is very, very low. I just so happen to think that the PBGC in fact has a very rich sugar daddy that won't ever allow it to go insolvent.

[mbozek]

Just how does the nonalienation provision of ERISA inhibit an employer from distributing accrued benefits in a annuity? ERISA only applies to benefits held in the DB plan, it does not apply to benefits that are distributed from the plan. Purchase of the annuity must meet the requirement of DOL reg 2509.95-1.

Since ERISA was enacted 40 years ago the legislative preference has been to encourage distribution of benefits in an annuity form. PBGC regulations allow an employer who terminates a DB plan to pay benefits in an annuity purchased from an insurer licensed to do business under state law. If an employer can purchase annuities for a plan that is voluntarily terminated why would ERISA prohibit a plan from voluntarily purchasing an annuity for a group of employees covered under the plan?

Plan can have many valid reasons for transferring longevity risk and investment risk to an insurer to avoid retaining increasing liabilities associated with those risks. In 2001 Bethelham Steel, the last of the legacy steel co declared bankruptcy. At that time it had 93,000 retirees and only 14,000 employees. VZ management can reasonably foresee a future business model where the number of employees will shrink because of improvements in IT which allow most work to be done by softwear and robots as its profit margin diminishes. Avoiding retirement benefit liabilities would keep it solvent. no brainer.

Under ERISA participants do not have a legal right to receive their benefits in a lump sum. 30 years ago TIAA-CREF was sued by participants because their benefits were provided in an individual annuity which did not have a lump sump option. Federal courts held that the employer could determine the form in which the benefit would be distributed.

As for bailing out the PBGC why would congress bail out the single employer trust fund when it refused to bail out the multi employer trust last year? Doesn't make sense to bail out one but not the other.

[MoJo]

Perhaps, mbozek, since you have all the answers to questions you have not been fully apprised of, you should seek appointment as a judge to hear cases like this.

Pretty much everything you argue is about what may, or may not happen, and what, in your opinion, is an approrpiate course of action.

You fail, however to address the pertinent issues in the case - that of fiduciary obligations and the breaches that the plaintiffs' have alleged, and the application of various other provisions of the Code and the Act.

I learned long ago to what may be reported in the "press" is usually not the whole story and I place faith in the system to actually work things out. In this case, as I understand it, the judge has allowed the case to proceed for now - meaning, he or she has found some possibility that the plaintiffs' claims have merit.

I'll trust the judge more than you mbozek - and I do so with all due respect to you. You simply haven't got nearly as much information as the judge has.

This discussion is about the theoretical positions and defenses - NOT who will prevail on the merits.

[mbozek]

Congress could have extended the non alienation provision to apply after benefits were distributed to the participant since both SS benefits and Veterans disability benefits cannot be seized by creditors after they have been distributed to recipients. But Congress chose not to do so. Since the benefits have no creditor protection after distribution there is no requirement than an annuity contract distributed to a participant must have such protection.

As for fiduciary breaches I have addressed the issues by citing the DOL regs and PBGC regs that allow an employer to purchase annuities for participants in DB plans. Don't see how purchase of an annuity benefit for a DB participant that complies with the applicable regs can be held to be a breach of fiduciary duty because the annuity may be subject to claims of the employees creditor. Employee's rights to annuity can be protected under state law or by placing annuity in a trust.

[MoJo]

"Congress could have extended the non alienation provision to apply after benefits were distributed to the participant since both SS benefits and Veterans disability benefits cannot be seized by creditors after they have been distributed to recipients. But Congress chose not to do so. Since the benefits have no creditor protection after distribution there is no requirement than an annuity contract distributed to a participant must have such protection."

And you, knowing all as you do, know the entire extent of the anti-alienation provision, with absolute certainty, without doubt or challenge by anyone. Gee. Let's just do away with courts.

BTW, the argument is that it was a breach of fiduciary duties to unilaterally sacrifice the anti-alienation protections afforded by the Code. The JUDGE apparently agrees there may be some merit there.

"As for fiduciary breaches I have addressed the issues by citing the DOL regs and PBGC regs that allow an employer to purchase annuities for participants in DB plans. Don't see how purchase of an annuity benefit for a DB participant that complies with the applicable regs can be held to be a breach of fiduciary duty because the annuity may be subject to claims of the employees creditor. Employee's rights to annuity can be protected under state law or by placing annuity in a trust."

An so, because mbozek says so, just because the REGS allow for something, there can be no challenge of the PROCESS undertaken by the fiduciary to effectuate that? I'm reminded of something an attorney once told me - The Regs are but one interpretation of hte law..., and not necessarily the correct one." That was Dean Hopkins - of McDonald Hopkins in Cleveland, Ohio, and he said it to the US Supreme Court in a case involving Drs. Hill and Thomas (a Cleveland based multipractice physicians CORPORATION) = challenging the IRS' interpretation that professional corporation were to be treated as "partnerships" for benefit purposes (back in the day when partnership benefits were less than what a corporation could provide). He won - and henceforth professional corps were treated as corps for all benefit purposes - AND the IRS relented and changed the regs equalizing benefits between partnerships and corps.

Just sayin.... But we have mbozek saying one thing, and a FEDERAL JUDGE saying another.

I'll listen to the Judge - and read the opinion when it's issued. Then we'll know the facts, the law, and that judge's opinion of the application of the law to the facts. I would expect appeals. Then we may have even more analysis on the subject. But.... everyone could save a lot of time and money and just pay attention to mbozek.

Sorry mbozek. I don't mean to be mean - but litigation is continuing for a reason. There *IS* a dispute. The judge - after having been briefed by the parties, believes there are things yet to be determined. For now, the answer is *NOT* as black and white as you portray it.

[david rigby]

Play nice.

[mbozek]

There are a number of defects in the VZ employees case that are inconsistent with legal principles:

1. The constitution requires that only cases or controversies can be heard in federal court. Hypothetical claims are not permitted. Under the VZ employees complaint no harm is alleged to have occurred as a result of transferring the VZ pension liabilities to Prudential. Complaint is based on possible risk that Pru will not be able to pay the pension benefit to the 41,000 VZ retirees because of some financial default in the future which would not occur if VZ had retained the benefits in the VZ retirement plan. The other risk cited is that a VZ retiree could have his Pru annuity benefits seized by creditors in the event of bankruptcy. (Of course ERISA does not protect a participant's retirement benefits after they have been paid and a creditor can seize them from his bank account.) The claim of possible harm in the future is not a claim that can be brought in federal court.

2. The employees also claim that the decision to purchase the annuity is a fiduciary investment decision which violates several provision of ERISA. Federal courts have held that the purchase of an annuity is a settlor decision to distribute benefits which is permissible if made under the terms of the plan and complies with the DOL reg on selection of the annuity carrier.

3. The VZ employees association is mistaken in its believe that Pru could sell off assets in its General account which could impair the ability of the insurer to pay benefits to VZ retirees in the future. The insurance reserves of a state regulated Life insurance Co are the property of the policyholders/beneficiaries, not the stockholders of the insurance Co and cannot be sold by the insurer if it would impair the ability to pay annuity benefits guaranteed by the company's general account.