Companies interested in transferring pension obligations to insurance companies got the green light from a federal judge who denied a request to halt Verizon Communications' transfer of $7.5 billion of pension obligations to Prudential Insurance.
"Hang on to your seat belt. This is going to be a major stampede now," said Jack Cohen, 69, who retired in 1994 from what was then known as Nynex.
"This does not bode well for retirees," the Yorktown Heights, N.Y., resident added.
Mr. Cohen's concern is shared by many of the 41,000 retired management workers whose pension plans are being moved. They worry they are no longer protected by federal pension law and that their pensions will be guaranteed by state insurance funds rather than the federal Pension Benefit Guaranty Corp.
Two Verizon retirees, acting on behalf of the entire group, filed a lawsuit in federal court in Dallas seeking to prevent Verizon from making the transfer. U.S. District Court Chief Judge Sidney A. Fitzwater rejected the motion Dec. 7. He ruled that the retirees were not likely to prevail on their broader lawsuit and did not prove they could be harmed if an injunction were not issued.
Companies have been transferring pension obligations to insurance companies for years, but most of those cases involved transfers much smaller than some of the transactions announced this year. General Motors is transferring $26 billion in pension obligations, offering lump sum payments to retirees willing to accept the risk and transferring the pension of retirees who did not want a lump sum to Prudential. Other companies -- including NCR, The New York Times and Archer-Daniels-Midland -- have followed suit.
The transfers strengthen corporate balance sheets by removing pension costs, obligations that are increasing because of chronically low interest rates. The lower that interest rates are, the more pension liabilities grow. That's because low interest rates mean assets in the pension fund will not grow as fast, so there has to be more money to meet future obligations.
Here's how the transactions work. Companies transfer a portion of stocks, bonds and other securities in their pension funds to Prudential or another insurer. Verizon disclosed last week it contributed approximately $2.6 billion to its pension plan in connection with the transfer.
Companies also pay the insurer a premium to assume the pension risk. The premium is based on whether the pension obligations being shifted belong to current workers or retirees, how old the workers or retirees are, and other factors.
Once the transfer to the insurance company is completed, retirees receive the same monthly pension checks, only from the insurer instead of their former employer.
Carol Buckmann, a lawyer with Osler, Hoskin and Harcourt in New York, said Verizon retirees could appeal the ruling even though the pension transfers have been going on for years.
"I do not see them prevailing, because this is not a new concept," Ms. Buckmann said, adding that the ruling should reduce concerns of other companies considering downsizing their pension risk.
The fact that they will be getting the same monthly benefits does not alleviate the concerns of some Verizon retirees.
They are worried about Prudential transferring their benefits to another insurer and about Prudential failing. Insurance company failures are rare. But if an insurer that acquired pension obligations from Verizon or another company failed, that could put retiree benefits in jeopardy.
"I think that we learned from the financial crisis that nothing is too big to fail," Mr. Cohen said.
While Verizon was responsible for the pensions of the 41,000, the PBGC was on the hook if Verizon went bankrupt. The federal agency will pay maximum annual benefits of $57,477 to a 65-year-old retiree whose bankrupt company's pension plan is transferred to the PBGC next year.
But once pensions are transferred to an insurer, the pensions are backed by state insurance guarantee funds. Protection varies from state to state, with maximums running from $100,000 to $500,000. Pennsylvania guarantees up to $300,000.
Don Kaufmann, a Gettysburg resident who retired from Bell Atlantic in 1995, said that means a Verizon retiree with a $40,000 annual pension benefit who lives in Pennsylvania would only get seven and a half years of coverage if Prudential failed compared to the lifetime protection the PBGC offers.
"Is there more risk to retirees long term? I think there is," Mr. Kaufmann said. "I just don't think some of the state insurance agencies are as solid as [federal pension law] and the PBGC."
Many would question Mr. Kaufmann's assessment. Last month, the PBGC reported a record $34 billion deficit for the fiscal year that ended Sept. 30.
Mr. Cohen is concerned with what he thinks has been a steady erosion of employee benefit laws that were supposed to protect retirees. He said the trend was well documented in the book "Retirement Heist," in which Wall Street Journal reporter Ellen Schultz illustrates how companies use poorly written laws and the legal system to diminish employee and retiree benefits while enriching top executives.
"I had to stop every 10 pages because my blood pressure was going off the wall," he said.
Len Boselovic: email@example.com or 412-263-1941.