Ex-employees sue Verizon over pension transfer deal with Prudential, RGA

A group of ex-Verizon employees filed the latest lawsuit challenging the efficacy of insurance companies managing pension funds.

Filed Monday in the Southern District of New York, the Verizon pensioners claim the pension risk transfer (PRT) deal agreed to in March threatens their retirement funds. Verizon inked the $5.9 billion PRT deal for Prudential Financial and Reinsurance Group of America to manage the pensions of 56,000 Verizon retirees and their beneficiaries.

Prudential and RGA agreed to “irrevocably guarantee and assume 50% of the benefit obligation to the retirees, except in certain jurisdictions where Prudential will irrevocably guarantee and assume 100% of the benefit obligation,” a news release said.

The transaction is the second major PRT deal between Prudential and Verizon. In 2012, Prudential completed an approximately $7.5 billion transfer that covered approximately 41,000 of Verizon’s retirees.

Neither Prudential or RGA is named as a defendant in the new lawsuit. Instead, plaintiffs are suing Verizon, several Verizon groups connected with the pension plan, and State Street Global Advisors Trust Co. State Street served as “the independent fiduciary” in putting the deal together, the lawsuit says.

But State Street “was anything but independent,” claim plaintiffs Maureen Dempsey, Heinz E. Schlenkermann, and Chris Shelton, all ex-Verizon employees.

“State Street directly profited from the annuitization transactions through its common stock holdings in Verizon, Prudential Financial … and RGA,” the lawsuit states. “State Street’s own financial interests were improperly served by off-loading Verizon liabilities to PICA and RGA, and by helping Verizon obtain the cheapest available annuity provider, as opposed to the ‘safest available’ annuity provider as required by ERISA.”

PRT deals surge

The Employee Retirement Income Security Act (ERISA) is a federal law that sets minimum standards for most private sector retirement and health plans. PRT deals have become big business in recent years, as companies look to offload hefty pension commitments. Meanwhile, insurers and private equity firms crave the chance to invest and reap fees from large pots of pension funds.

In 2023, PRT deals surged to a record 773. But pensioners say they are caught in the middle and unprotected. Since the start of 2023, Lockheed Martin, GE, AT&T, and Alcoa have been sued by employees in class action lawsuits.

Verizon employees say they are now invested in unwanted and “risky group annuities.”

“Instead of going through a rigorous, independent and thorough selection process that took into consideration the requisite analysis that an ordinary and prudent ERISA fiduciary is required to undertake, Verizon and State Street chose to purchase substandard annuities for Verizon retirees from PICA and RGA, which are both heavily dependent upon transactions with affiliates that are not transparent and expose plan participants to unreasonable amounts of risk and uncertainty,” plaintiffs claim.

Neither State Street nor Verizon responded to requests for comment.

‘Regulation light’

The lawsuit appears to reference risky offshore reinsurance arrangements that have become commonplace in the life insurance industry. Prudential and RGA are dependent on affiliates domiciled in “regulation light” jurisdictions “where wholly owned captive reinsurers and affiliates are permitted to count debt instruments as assets and are not required to file publicly available financial statements in accordance with Statutory Accounting Principles,” plaintiffs note.

Plaintiffs claim that State Street and Verizon “ignored obvious red flags” with Prudential and RGA's reliance upon affiliates “within the same controlled group.”

The dangers of risky retirement annuities is not just hypothetical, plaintiffs note. In the 1980s, hundreds of employers replaced their pension plans with retirement annuities from Executive Life Insurance Co. Executive Life had embarked on a disastrous “junk bond” investment strategy.

The pension benefits of approximately 84,000 workers and retirees were transferred from the federally regulated pension system to Executive Life, the lawsuit says.

“Executive Life was often selected by employers because it offered the lowest bid on group annuity contracts,” plaintiffs say. “Rather than choose a safer, more expensive annuity, employers placed their own financial interests over plan participants’ needs.”

In 1991, Executive Life became insolvent and pensioners lost billions in valuable retirement funds, the lawsuit notes.

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