In 1991, Executive Life Insurance Company collapsed, leaving retirees from companies like RJ Reynolds and Pacific Lumber with significant cuts in their pensions. This was due to transfer contracts that allowed companies to pay their retirees’ pensions through Executive Life, which offered high interest rates backed by junk bonds. Two decades later, GM and Verizon led a trend in corporate America where over $300 billion in retiree assets have been offloaded to insurance annuity providers and private equity investors.
Recently, many companies have been terminating their pension plans and replacing them with annuities, citing recent stock market gains and higher interest rates that boost pension assets and make the transfer profitable. This trend has been fueled by the surplus funded status of many corporate defined benefit plans in the U.S., with companies like IBM reinstating their defined benefit plans and others derisking their obligations.
In March, Verizon completed a $5.9 billion transfer of 56,000 pensions to group insurance annuities with Prudential Insurance company and RGA, following in the footsteps of ATT, who de-risked their pension obligations in an $8 billion transaction. However, workers and retirees from both companies are fighting back against these changes, expressing concerns about the safety of their pensions and the impact of the transactions on their retirement security.
The Communications Workers of America (CWA) has supported a lawsuit against ATT filed by affected retirees, alleging that AT&T violated requirements under ERISA as fiduciaries to act in the best interest of plan participants. The choice of insurance companies, Athene Annuity and Life, has also raised concerns, with NBC journalist Gretchen Morgenstern highlighting the risky portfolios of these companies and their potential impact on retirees’ benefits.
De-risking not only poses risks to workers and retirees but also limits the possibility of pension improvements like cost-of-living adjustments post-de-risking. Investment gains that would have traditionally gone to the workers in a DB plan now go to the company, causing additional losses for workers and retirees. Total U.S. pension risk transfer premiums have been on the rise, with 850 pension risk transfer contracts completed in 2023, 25% more than in the previous year.
Despite the defense by the American Council of Life Insurers (ACLI) of the strength of the insurance companies backing these transfer contracts, concerns remain about the stability of these agreements and their impact on retirees’ benefits. The potential risks associated with pension de-risking have historical precedents, such as the Studebaker company’s termination of its employee pension plan in 1963, resulting in devastating losses for thousands of auto workers. A cautionary tale for the potential consequences of de-risking, especially in the context of vulnerable retirees and workers.
