By Jacob Adelman
Verizon Communications is being sued by retirees who say the telecom firm endangered their pensions by "offloading" the plans to insurers, including a unit of Prudential Financial, to be paid out as annuities contracts.
Verizon failed in its fiduciary duty to the retirees by sealing the transactions with the insurers, according to the complaint filed Monday in U.S. District Court for New York's Southern District. The suit alleges that opaque deals with affiliated firms put pensioners' financial security at risk.
The pensions of 56,000 Verizon retirees, involving $5.7 billion in assets, were impacted by the transaction, according to the lawsuit.
State Street, which advised Verizon in the March 2024 deal with Prudential Insurance Company of America and RGA Reinsurance, is also named as a defendant in the lawsuit, for which class-action status is being sought.
Prudential and RGA, a unit of Reinsurance Group of America, "are both heavily dependent upon transactions that are not transparent and expose plan participants to unreasonable amounts of risk and uncertainty," attorneys for the retirees wrote in the suit.
Prudential and RGA, which are not named as defendants, didn't respond to messages from Barron's seeking comment. Verizon and State Street also didn't respond to messages.
Pension-risk transfers, as the deals are known, are a growing source of business for insurers, which are able to assume large blocks of premiums from employers seeking to shed the risk and administrative burden of operating those plans themselves.
Insurers bought out a total of $14.2 billion in pensions during the first nine months of 2024, up 36% from the same period in 2023, according to a December report from LIMRA, an insurance marketing and research association.
The recent Verizon employees' lawsuit follows a spate of litigation last year targeting pension-risk transfer deals involving Athene, the insurance and annuity business owned by private-equity giant Apollo.
Those complaints centered on the investment practices of private equity-affiliated insurers like Athene, which back policies with assets such as securitized private debt. The filings portrayed those assets as presenting greater risk than conventional securities, such as corporate bonds.
Athene has said in response to the suits that it is well capitalized, properly reserved, and soundly invested.
This week's complaint is the first known pension-risk-transfer lawsuit involving traditional insurers, which are commonly seen as following more conservative investment strategies than their private-equity backed peers.
It focuses on Prudential's and RGA's use of affiliated reinsurers in Arizona and offshore in Bermuda and Barbados. Regulators in those jurisdictions allow the assets in question to be reported with less precision than is typically permitted.
"Without clarity around the assets, liabilities, structure and claims-paying ability of these wholly owned captive reinsurance companies and affiliates, State Street and Verizon could not possibly have met their obligations as prudent fiduciaries," according to the complaint.
The plaintiffs also accuse Prudential of falsely portraying transactions with closely linked reinsurers as nonaffiliated arm's-length deals.
One such partner, Prismic Life Reinsurance of Bermuda, took on $10 billion in business from Prudential in 2023, listing the deal on its annual filings as having been with a non-affiliate, according to the complaint.
Prudential Financial is one of two lead investors in Prismic, according to unspecified public filings cited in the complaint. A Prudential unit also provides asset-management services to Prismic, and Prudential executives sit on Prismic's board of directors, according to the suit.
The retirees also allege that the deal cost them valuable protections by putting their pensions out of reach of the Pension Benefit Guaranty Corp.
The PBGC is a federally chartered organization that covers potential losses to retirees if their employers go out of business. The insurer-operated annuity plans are instead covered by more limited state-level backstops, according to the suit.
Write to Jacob Adelman at jacob.adelman@barrons.com
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January 03, 2025 13:30 ET (18:30 GMT)
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