Luffing The Sails.
"Pension risk transfers".
Since leaving The New York Times, Mary Williams Walsh has written a number of pieces for News Items about “pension risk transfers”. This is her latest. Nobody does it better. — JE
For years, U.S. retirees’ pensions have been sailing off to Bermuda at high speed. Now, a federal judge has luffed the sails.
It happened at the end of March, in a lawsuit filed by a group of retirees from Lockheed Martin. The big aerospace and defense contractor operated traditional pension plans for decades, but decided about four years ago to join the stampede of companies paying life insurers to take over the obligations. Lockheed paid Athene Iowa $9.2 billion to take over the pensions of about 32,000 people. The transactions, called “pension risk transfers” in industry lingo, were irrevocable.
In Athene Iowa’s hands, the former pensions became group annuities. They lost their federal backstop through the Pension Benefit Guaranty Corp., because annuities are regulated by the states, which don’t have a PBGC. Athene Iowa then reinsured the annuities with its affiliate, Athene Annuity Re Ltd. (Bermuda). Both Athenes are units of Apollo Global Management, the big private equity firm. Athene Re pays Apollo to invest its reinsurance reserves.
Now the retirees’ financial well-being is in the hands of the Bermuda Monetary Authority, which doesn’t have a PBGC either. Nor does Bermuda have the hyper-detailed financial reporting standards required by U.S. state insurance commissioners. If the retirees can even find their money in Bermuda, they still can’t find out how it’s being invested. If they could, and they didn’t like what they saw, they wouldn’t be able to withdraw their money anyway.
Similar things have been happening to millions of aging Americans.
The Lockheed retirees weren’t told about the pension risk transfers until the deals were done, set in stone. Some were angry enough to sue, seeking class action status.
It was by no means the first time retirees have sued over a pension risk transfer. What makes the Lockheed case different is that it may actually go to trial. We at News Items have been watching these lawsuits for years, and this is the first time we’ve seen one survive a former employer’s motion to dismiss it.
Now that the Lockheed retirees have gotten over that bar, others are likely to try it too, bringing the possibility of change to the booming practice of reinsuring Americans’ pensions offshore. The trend has been setting records – last year there were 505 pension risk transfers, worth $51.8 billion, according to Aon. But it has also raised the concerns of oversight bodies like the Federal Reserve, the National Association of Insurance Commissioners, and even the International Monetary Fund, which has a mandate to track possible sources of financial instability.
Normally, pension-risk-transfer lawsuits are doomed by a lack of Article III standing, so-called because Article III of the U.S. Constitution requires it of anyone bringing a case in federal court. To have such standing, plaintiffs must show they’ve suffered an “injury in fact,” which can be redressed by a favorable court ruling. “Injuries in fact” must be “actual or imminent, not conjectural or hypothetical,” among other things.
Employers in these cases invariably file motions to dismiss them, saying the retirees have not been injured. After all, they’re still getting the same monthly pension checks as ever – the money just comes from an insurer instead of a pension fund. What’s the harm in that? With no losses, the employers have argued, the retirees have no standing. Until now, judges have invariably agreed with them. The lawsuits were thrown out. A lawsuit against Alcoa was thrown out by a different court on the very day the Lockheed plaintiffs got their green light.
In the Lockheed case, Judge Brendan A. Hurson of the U.S. District Court in Baltimore saw a small opening for the retirees in the wall of adverse precedent. He wrote that the relevant question wasn’t whether they were still getting their pensions every month, but whether they had adequately alleged that Lockheed’s transfer of the plans to Athene represented “mismanagement egregious enough to generate a substantial risk of default.” He found that the retirees had done that, “if only barely so.”
(If Judge Hurson’s name rings a bell, it may be because he made headlines in February by blocking two of President Trump’s executive orders denying federal funding to hospitals that cared for transgender minors.)
Judge Hurson also noted that while federal law holds companies and their pension trustees to the highest fiduciary standards, it also allows them to end their fiduciary duties by sending their pension plans to insurers. That leaves plenty of room to argue over whether a company still had those demanding fiduciary duties when it selected an insurer.
Lockheed’s retirees argued that the company still had its fiduciary duties at that point and was therefore required to put their interests ahead of its corporate interests, identify the “safest annuity available,” and do business with the insurer offering it. Lockheed chose Athene, they said, not because it was in the retirees’ best interest, but “to save the company money and enhance corporate profits.”
Lockheed argued that it was not acting as a fiduciary when it selected Athene. It said further that the retirees were being driven by “inchoate fear” of some unnamed harm that might befall them some day, but they didn’t have any losses in the present.
The plaintiffs’ team responded with an expert declaration that analyzed Athene Iowa’s financial strength and compared it to other insurers. The analyst, Tom Gober, said a complete review was impossible because Bermuda allowed Athene Iowa’s counterparty, Athene Re, to keep the necessary data secret. He could see only one side of Athene’s billions of dollars worth of offshore reinsurance — the Iowa side. Once the obligations had been transferred to Bermuda, they were invisible. It was impossible to tell how they were being secured. Gober said that alone should have prompted Lockheed to scratch Athene off its list of prospective “safest annuity” providers.
Gober also looked at several other insurers’ credit ratings and borrowing costs, as well as the market prices of their annuities. He found that the market would pay less for the same annuity from a free-wheeling insurer, like Athene, than from a triple-A rated life insurer, such as New York Life.
“If an annuitant receives the same cash flow, but from an issuer of lower creditworthiness, it is a loss for the annuitant,” he wrote. “The amount of this loss … is real and substantial in dollar terms.”
So much for the argument that the Lockheed retirees are suffering from “inchoate fear” of some possible loss in the future. The markets say they’ve already been dealt a loss. They just weren’t supposed to find out about it.
Now that they have, they’re asking the court for “appropriate relief,” such as the posting of additional security “to ensure that participants receive their full benefits, plus prejudgment interest.”
The retirees don’t have any standing to sue Athene, just Lockheed. The big defense contractor can’t be happy at the possibility of having to put up more money for defined-benefit pensions, after paying billions to get out of the pension game for good.
But the retirees can take only Lockheed to court, not Athene. So, while Lockheed has been defending its dealings with the insurer, Athene has been expanding and setting records. It’s by far the nation’s biggest retail seller of annuities – the kind that individuals buy through financial advisers. And now Athene and its parent, Apollo, are looking for ways into the $12 trillion market for 401(k) plans and similar work-based retirement programs. Today’s employees are missing out, they say.
“When private investments are added to retirement solutions, “the results are not just a little bit better, they’re 50% to 100% better,” said Apollo CEO Marc Rowan in a February earnings call.
Just close your eyes and don’t think about risk.