GE sued over $1.7 billion pension risk transfer

GE is facing a proposed class-action lawsuit over its transfer of $1.7 billion in pension liabilities to an insurance company.

The company is the latest among several large companies sued over similar practices this year, all of which made pension risk transfers to Athene Annuity and Life Co. While Athene has not been named as a defendant in any of the cases, its pension risk transfer business has been the subject of litigation against employers, as the business “is a highly risky private equity-controlled insurance company with a complex and opaque structure,” the recent complaint against General Electric stated. The other companies sued so far include Lockheed Martin, AT&T, and Alcoa. The case against AT&T also names State Street Global Advisors as a defendant.

The new case against GE, which was brought by law firm Schlichter Bogard, further shows that plaintiffs’ firms see pension risk transfers as a big new area for retirement plan litigation. Schlichter Bogard was the firm behind much of the early class action cases involving 401(k) fees and investments, and it has won massive, multi-million-dollar settlements and awards in many of the lawsuits.

“This transaction affected over 70,000 GE retirees and their beneficiaries who depended on GE to guarantee their pension benefits through retirement,” the June 28 federal court complaint against GE stated. Because of the move, some pension participants no longer have protection under the Employee Retirement Income Security Act and instead are covered by weaker and less consistent state insurance laws and regulations, the plaintiffs claim.

The federal law does not prohibit employers from making pension risk transfers, but it “does require that a fiduciary obtain the ‘safest annuity available,’” the complaint read.

“Annuities issued by Athene are structured to generate higher expected returns by investing in lower-quality, higher-risk assets without the traditional mix of quality assets to support future benefit obligations,” it read. “This strategy creates significant risk at a great cost to retirees.”

Further, state guaranty associations are not pre-funded, in contrast with the federal Pension Benefit Guaranty Corporation, with limits in most states sitting at $250,000 in present value of annuity benefits, “which a pensioner could exhaust in mere years if their annuity provider becomes insolvent,” according to the complaint.

GE did not immediately respond to a request for comment. Earlier this year, Athene said in a statement that the company believes the lawsuits are without merit and that the firm is well capitalized.

In an unrelated case involving its 401(k) plan, GE last year settled the dispute for $61 million, ending long-running litigation that accused the company of violating its fiduciary duties by using its own investment products in the more-than $30 billion plan beginning in 2011.

The new lawsuit comes less than a week after the Department of Labor issued a report to Congress about fiduciary standards that apply to selecting annuity providers for defined benefit pension plans. Although the DOL did not update the requirements outlined in an interpretative bulletin from 1995, it told Congress that the agency should “explore developments in both the life insurance industry and in pension risk transfer, also known as ‘derisking,’” hinting that it could update the standards in the future.

The emerging line of litigation is also worth paying attention to, particularly for financial advisors, given that most qualified annuity recommendations for ERISA plans will be fiduciary acts starting in late September due to the DOL’s fiduciary rule, said Michelle Gordon, owner of consultancy MRG Advisors, in an email. It’s also notable that ratings agency data may have lost credibility, but gained attention from the Securities and Exchange Commission, since the 2008 financial crisis, she said.

“Reps, advisors, and agents should take [this] as a warning regarding [the] basis of future litigation extending beyond just the pension risk transfer space,” she said.