U.S. defined benefit plan sponsors have been eager to explore de-risking options to control asset volatility and remove pension liabilities from their balance sheets. A report jointly issued on June 25 by the consulting firm Mercer and CFO magazine indicates that nearly half of respondents are considering annuitization at this time.

Even though annuitization of pensions is a long-standing practice under the U.S. Employee Retirement Income Security Act (ERISA), a cloud has been hanging over de-risking planning as a result of a lawsuit filed against Verizon by retirees challenging the annuitization of their pensions through Prudential. Among the various legal claims asserted are that the transaction violates ERISA by ending PBGC insurance protection for the retirees, discriminates against them, and that the possibility that pensions would be annuitized was not described in the summary plan description, the basic plan disclosure document for participants under ERISA.

The federal district court for the northern district of Texas, Dallas division, rejected the retirees’ attempt to enjoin the transaction last December, and earlier this year certified two classes of participants whose claims could proceed: the affected retirees and a second class of continuing plan participants who claimed that the remaining assets of the plan were depleted by high fees paid to Prudential. I wrote at the time that because the two class certifications would preclude forum shopping by plaintiffs trying to pursue the same claims in other courts, they could have the effect of helping Verizon if the court dismissed the claims. The district court has just issued a Memorandum Opinion and Order in which it did just that, but with a caveat.

First, the basics of the decision. The court made the following rulings, assuming solely for purposes of this decision that plaintiff’s allegations were true:

  1. The summary plan description was not required to disclose the possibility of future annuitization as a circumstance that could lead to the loss of benefits.
  2. In accordance with existing law, Verizon’s decision to amend the plan to provide for annuitization was not taken in a fiduciary capacity. Although implementation of the amendment involved fiduciary acts, plaintiffs did not make allegations sufficient to state claims that the compensation paid to Prudential was unreasonable or selection of Prudential as sole annuity provider was inappropriate.
  3. There was no impermissible discrimination against the retiree group selected to be annuitized so as to deprive them of their benefits or ERISA rights.
  4. The continuing participants did not have standing to challenge the annuitization even if it reduced plan assets because they did not show specific injury in the form of an effect on benefit payments.

A few issues make this less than a complete victory for Verizon. On the law, the court did not acknowledge that existing ERISA regulations specifically permit this form of annuitization. (They seem clear to many practitioners.) Procedurally, the court gave plaintiffs 30 days to replead and allege new facts. While it is difficult to envision additional allegations that would ultimately result in this court ruling for plaintiffs, the wrangling at the district court level will continue if plaintiffs replead. Of course, they can appeal to a higher court even if they do not replead. So while plan sponsors considering annuitization should get a lot of comfort from this decision, they need to keep following the trajectory of this case.