Pension De-Risking: Compliance and ERISA Litigation Considerations

On January 16, 2013, this blogger - Dr. Susan Mangiero - had the pleasure of speaking with (a) Attorney Anthony A. Dreyspool (Senior Managing Director, Brock Fiduciary Services) (b) Attorney David Hartman (General Counsel and Vice President, General Motors Asset Management) and (c) Attorney Sam Myler (McDermott Will & Emery) about compliance "must do" items and litigation vulnerabilities. Sponsored by Strafford Publications, "Pension De-Risking for Employee Benefit Sponsors" attracted a large audience of general counsel, outside ERISA counsel and financial professionals. In addition to numerous talking points shared by all of us presenting, we had lots of attendee questions about issues such as balance sheet impact, case law and annuity regulations.

Click to download the slides for "Pension De-Risking for Employee Benefit Sponsors."

In my opening comments, I described some of the factors that are being discussed as part of conversations relating to whether a plan sponsor should de-risk or not. These include, but are not limited to, the following:

  • Low interest rates;
  • Higher life expectancies;
  • Increased PBGC premiums;
  • Company's debt capacity;
  • Intent to go public or sell to an acquirer;
  • Available cash; and
  • Knowledge and experience of in-house ERISA fiduciaries.

Attorney Hartman urged anyone interested in de-risking to allow ample time of between six to eighteen months in order to file documents, research and create or modify policies and procedures as needed. He also advised companies to make sure that participants are fully apprised of their rights and to explain the merits of any particular transaction. For companies that may want to redesign a plan(s) for hourly workers, more time may be needed, especially if collective bargaining agreements are impacted.  His suggestion is to inform plan participants about state guarantees that apply in the event of an insurance company default. When retirees are emotionally attached to getting a check from their employer, care must be taken to allay any concerns that future monies will come from an outside third party. Keep in mind that the market may be moving at the same time that a deal is being put together. Regarding the transfer of assets, Attorney Hartman stated the importance of finding out early on what an insurance company is willing to accept. An independent appraiser may be required to determine the appropriate value of certain assets.

I talked about the various risks that can be mitigated via de-risking versus those that are introduced as the result of some type of defined benefit plan transfer or derivatives overlay strategy. The point was made that there is no perfect solution and that facts and circumstances must be taken into account. I added that litigation may arise if a plaintiff (or class of plaintiffs) question any or all of the following items:

  • Whether executives are unduly compensated as the result of an earnings or balance sheet boost due to de-risking;
  • Timing of a transaction and whether interest rates are "too low" at the time of a deal;
  • Completeness (or lack thereof) of information that is provided to participants;
  • Amount of fees paid to vendors;
  • Use of an independent fiduciary;
  • Level of asset valuations;
  • Use of an independent appraiser;
  • Extent to which due diligence was conducted on the structure of deal; and/or
  • Level of vetting of "safest available" annuity provider.

Attorney Dreyspool emphasized that ERISA fiduciaries must demonstrate procedural prudence. This could entail an assessment of factors that include but are not limited to:

  • Amount of cash out;
  • Which participants will be impacted;
  • How the plan is to be terminated; and/or
  • Alternative transactions that a plan sponsor might have adopted instead.

He gave a long laundry list of items that must be considered when vetting an insurance company, should a transaction involve an insurer. While not exhaustive, factors to review include the following:

  • Quality and diversification of insurer's investment portfolio;
  • Size of insurer relative to proposed contract;
  • Level of insurer's capital and surplus;
  • Lines of business of the insurer and other indications of its exposure to risk;
  • Structure of the annuity contract;
  • Guarantees supporting the annuities, like separate accounts;
  • Availability of protection through state associations; and/or
  • Size of the guarantee.

The audience was encouraged to review DOL Advisory Opinion 2002-14A (dated December 18, 2002) and ERISA Section 404(a).

Attorney Myler presented litigation slides prepared in part by senior ERISA litigator Nancy G. Ross (also with McDermott Will & Emery). He explained the civil enforcement law relating to contract claims, asserting that a lawsuit could focus on what a participant was promised versus what they received. He differentiated between settlor functions and fiduciary acts as a cornerstone of any lawsuit that could be brought against a member of a company's investment committee and/or any of the service providers involved in a particular de-risking transaction.

There seems to be no shortage of case precedents with respect to disputes already making their way through the court system. Attorney Myler discussed Kuntz v. Reese, Call v. Ameritech Management Pension Plan, Laurenzano v. Blue Cross/Blue Shield and Lee v. Verizon Communications Inc., inter alia.

Indeed, it is worthwhile listening to review the in-depth comments made by all speakers. The topic is broad and important with no doubt more activity to occur in the U.S. and elsewhere.