Practitioners are suggesting that Verizon Communications’ decision in December 2012 to pay Prudential Insurance Company of America an $8 billion premium to take over monthly pension payments to 41,000 retirees was a “game changer” in de-risking strategies by employers for defined benefit plans, and may have altered the landscape of pension de-risking that relies on annuity forms of distribution. Moreover, practitioners note, the Pension Benefit Guaranty Corporation (PBGC)  has issued no public comment on the transaction. These practitioners are surprised about the PBGC’s silence in light of the its 2009 request for  comments on purchases of irrevocable commitments before plan terminations, which suggested that the PBGC would take issue with divesting pension obligations by the purchase of annuity contracts outside of a complete, approved plan termination. However, in the December 29, 2010, Federal Register, the PBGC announced that, after examining 10 comments on the issue, it was not taking further regulatory action or providing specific guidance on the purchase of irrevocable commitments before standard termination.

PBGC Director Joshua Gotbaum has previously told Bloomberg BNA that, although it is understandable for businesses to want to reduce the volatility of their obligations in offering pensions to their employees, there are better and worse ways to minimize pension plan risks, stating that “dumping” pension obligations in a lump sum on employees does a disservice to them, even if voluntary, because many employees will not have the expertise to manage those lump sums. According to Gotbaum, de-risking that involves the purchase of annuities is preferable. Meanwhile, in Lee v. Verizon Communications Inc., No. 3:12-cv-04834-D (N.D. Tex.), in which the plaintiffs' request for a preliminary injunction was denied, the plaintiffs have continued with their underlying claims that the annuity purchase was a fiduciary breach, and Verizon has filed a motion to dismiss.

Should this issue be left to the courts to decide, or should the PBGC and/or the Department of Labor step in?

Mark C Wolf, Editor (Compensation Planning)