Surge in pension risk transfer lawsuits, as private equity pursues annuity assets
In the last year, Lockheed Martin, AT&T, Alcoa and GE have been sued by employees in class action lawsuits over the PRT deals made with Athene, alleging the firm “breached their fiduciary duty,” says law firm Schlichter Bogard.
As the retirement industry evolves from guaranteed lifetime pension plans to 401(k)s, pension risk transfers (PRTs) have become the linchpin connecting the past, present and future of retirement benefits. These PRTs allow firms to offload the burdensome administration of allocating pension plans.
However, as private equity firms ramp up their pursuit of PRT deals, the number of related lawsuits has surged. In 2023, there were a record 773 PRTs, which is expected to grow. Increasingly, private equity firms are seeking to purchase stakes in annuity assets to gain access to a permanent capital stream.
PRTs are insurance solutions that allow a company to transfer the pension plan’s key risk to an insurer. The PRT process is governed by the Department of Labor and the Employee Retirement Income Security Act (ERISA), which prevents a plan sponsor from structuring pension risk transfers in a manner that reduces pension benefits, in order to ensure retirees’ financial security.
However, according to the lawsuits, these companies bypassed their fiduciary responsibility to select the safest annuity for their employees’ pension plans. Instead, they chose more profitable PRT deals with companies like insurer Athene, potentially jeopardizing retirees’ financial security by removing their ERISA protections, according to Schlichter Bogard, which has brought legal action against these major corporations, on behalf of plan participants.
Since last March, Lockheed Martin, AT&T, Alcoa, GE, and most recently, Lumen Technologies, have been sued by employees in class action lawsuits. “These PRT lawsuits are based on the unquestioned fiduciary duty of the employer that already exists under ERISA,” said Jerry Schlichter, founder of Schlichter Bogard, who is as a pioneer in legal action against 401(k) and 403(b) plan sponsors on behalf of retirees and savers.
“They all have Athene [Annuity and Life Co.] taking over their former pension obligations, and Athene is owned by a private equity firm with an in-house reinsurer based offshore, rather than a traditional life insurance company that is not owned by an offshore private equity firm,” said Schlichter.
“People who were comfortable with their employer being on the hook for their pension have become worried about some risky insurance companies taking over the obligation and eliminating the protections they had,” said Schlichter
“We allege the companies breached their fiduciary duty – the highest duty under the law – to work solely for the exclusive benefit of their employees by failing to pick the safest alternative available, as required, and saddling their employees with risky annuities that have less value than those of traditional life insurance companies because of their increased risk,” said Schlichter.
In the first half of 2024, Athene, a wholly owned subsidiary of Apollo Global Management, completed 48 PRT deals valued at $52.3 billion, affecting over 550,000 plan participants, according to their website.
Related: IBM completes $6B pension risk transfer to Prudential in group annuity buyout
Earlier this month, IBM completed a $6 billion PRT deal with Prudential in a group annuity buyout. However, this deal does not seem at risk of legal action because “Prudential is a traditional life insurance company that does not have the risk of Athene,” said Schlicter.