Court Affirms Dismissal of Verizon Pension Risk Transfer Suit

An appellate court ruled that the decisions to amend the plan and transfer certain assets to an annuity contract were settlor, not fiduciary, functions.

The 5th U.S. Circuit Court of Appeals has affirmed dismissal of a class-action lawsuit that arose from the decision by Verizon Communications in October 2012 to purchase a single premium group annuity contract from The Prudential Insurance Company of America to settle approximately $7.4 billion of Verizon’s pension plan liabilities.

The case includes two classes of pension plan participants: those whose benefit liabilities were transferred to Prudential and those whose liabilities remained in the plan. The appellate court agreed with the dismissal of claims of the non-transferee class by a district court because the class did not prove individual harm and, therefore, lacked standing to sue.

Plaintiffs in the transferee class argued that the Verizon defendants violated their duties under the Employee Retirement Income Security Act (ERISA) in part because summary plan descriptions (SPDs) prior to the plan amendment providing for the transfer to Prudential did not disclose the possibility that benefit obligations could be transferred to an insurance-company annuity absent a plan termination or spin-off/merger. The 5th Circuit found that argument lacked merit in light of its precedent, which holds that ERISA does not require SPDs to describe future terms, and statutory language requires only retrospective notice of plan amendments. In its opinion, the court noted that ERISA only requires that administrators provide a summary of material modification or change “not later than 210 days after the end of the plan year in which the change is adopted.”

The court found that the plan fiduciaries provided notice shortly after the amendment’s adoption, well within the time limits imposed for notice of plan amendment. It also noted that the pre-amendment SPDs advised participants of Verizon’s reservation of the right to amend the plan, and the possibility that an amendment might affect their rights under the plan.

NEXT: The decision to transfer was a settlor function

The transferee class alleged Verizon defendants’ made several breaches of fiduciary duties under ERISA §404(a)(1)(A), which requires that plan fiduciaries use plan assets “for the exclusive purpose of providing benefits” and “defraying reasonable expenses of administering the plan.” The appellate court noted that actions by a plan sponsor “to modify, amend or terminate the plan” are outside the scope of fiduciary duties; “such decisions are those of a trust settlor, not a fiduciary.”

The 5th Circuit cited a U.S. Supreme Court decision in Hughes Aircraft Co. v. Jacobson, in which the Supreme Court said, “[i]n general, an employer’s decision to amend a pension plan concerns the composition or design of the plan itself and does not implicate the employer’s fiduciary duties which consist of such actions as the administration of the plan’s assets,” as well as decisions “regarding the form or structure of the plan.” The appellate court held the annuity amendment was a sponsor function of plan design, authorized under ERISA through its provision governing the purchase of annuities by plan fiduciaries. ERISA and related regulations authorize annuity purchases, and do not prohibit such purchases during an ongoing plan; and even assuming ERISA prohibits annuity purchases during an ongoing plan, the plaintiffs cite no authority that the prohibition’s violation would subject an otherwise settlor function to fiduciary requirements, the court said.

The transferee class also asserted that plan fiduciaries should have obtained their consent before transferring the pension obligations to the annuity contract, but the 5th Circuit found that assertion is neither supported by the terms of ERISA, which itself contains no such requirement for consent, either in the provisions detailing fiduciary duties, or in the provisions governing ERISA-compliant annuity purchases. 

NEXT: No interference of benefits or excessive fees

In its complaint, the transferee class argued that a loss of benefits encompasses federal protections under ERISA and the Pension Benefit Guaranty Corporation (PBGC). But, the court said they provided no authority supporting the inclusion of ERISA and PBGC protections as “benefits” within the meaning of ERISA § 102. “Countenancing against Appellants’ argument, this interpretation of “benefits” is more expansive than the ERISA regulation governing the purchase of annuities by plan fiduciaries (“Annuitization Regulation”), which requires that such transactions guarantee a participant’s “entire benefit rights,” the court wrote. It said that, by failing to allege a viable right with which the amendment interfered, the plaintiffs failed to state a claim.                 

Finally, addressing the $1 billion in fees Verizon paid for the annuity purchase, the court found Verizon did not violate a duty to make sure the fee was reasonable. “Although the allegations enumerate various expenses associated with the implementation of Verizon’s decision as settlor, they wholly fail to address how those expenses are not reasonable expenses which are payable by the plan,” the court wrote. “In light of the $7.5 billion in attendant obligations, we will not conclude that this allegation alone is sufficient to support unreasonableness under our pleading standards.”

The court affirmed dismissal of the claims of the transferee class by the U.S. District for the Northern District of Texas. The opinion in Lee v. Verizon Communications is here.