According to a recent press release from LIMRA Secure Retirement Institute, eight out of ten defined benefit plan sponsors are “at least somewhat interested” in pension de-risking via the purchase of a group annuity contract. LIMRA reports that the first half of 2019 saw over 160 new pension risk transfer deals, totaling over $10 billion and that “recent growth in this market has predominantly been driven by small to mid-sized deals.” The sales forecast for pension risk transfers in 2019 is between $20-$25 Billion.
The class action lawsuit, Thondukolam v. Corteva, Inc., was filed in the United States District Court for the Northern District of California, case number 3:19-cv-03857-SK.
The proposed class includes more than 100,000 people, including retirees and beneficiaries in the pension plan. Edward Stone Law PC is working with Beasley Allen, Kantor & Kantor, and Sinclair Law Firm, to represent the retirees.
In 2015, the 217-year-old DuPont merged with Dow Chemical to create DowDuPont. In 2019, the new corporate entity split into three new companies Corteva, DuPont and Dow. Corteva is a combination of DuPont and Dow agriculture businesses. Through this scheme, DuPont and Dow shifted all liability for the DuPont U.S. pension, which has covered DuPont employees in America since 1904, to the newly created Corteva. The liability of the DuPont U.S. Pension plan is approximately $19 billion.
Plaintiffs argue that Corteva, which solely focuses on agriscience business, understates its liabilities including income fluctuations due to weather, global trade, and other factors beyond the company’s control. Additionally, the agriscience business involves the manufacture of chemicals already subject to large-scale litigation, the liability for which was also transferred to Corteva. Other corporate spin transactions of DuPont have also come under scrutiny. Plaintiffs also contend that under Corteva the pension plan is underfunded and uses overly optimistic estimates. Now that Corteva, Dow, and DuPont are three separate companies, Corteva can file for bankruptcy and discharge its responsibility to fund the promised pensions, leaving retirees to receive pennies on the dollar. Neither DuPont nor Dow will be affected by such a bankruptcy.
“Because of the Defendants’ actions, the plan, which was already in a downward funding spiral, is now left with an empty shell company as a plan sponsor, linked to a newly formed company that is also saddled with all of the environmental and agricultural liabilities of the historical Dow/DuPont companies. This completely separated the new, stable Dow and DuPont companies from any repercussions should the pension fail. The Defendants have attempted to avoid a legally required $6 billion funding obligation to the plan and thereby breached their fiduciary duties to the Plan as well as violated ERISA’s employee protective purpose. This lawsuit will correct this misconduct by the plan sponsors.” said W. Daniel “Dee” Miles, head of Beasley Allen’s Consumer Fraud Section.
According to a recent survey by Mercer, more defined benefit plan (DBP) sponsors seek to de-risk due to volatile markets and uncertain costs. Mercer also reported that risking Pension Benefit Guaranty (PBGC) premiums have a significant impact on funding decisions. In a June 25, 2019 press release, Matt McDaniel, head of Mercer’s US Financial Strategy Group, was quoted as saying “Given the challenges of increased market volatility and uncertain costs plan sponsors face today, many are reevaluating how they want to achieve their long-term pension plan goals. We are seeing many sponsors take a critical look at their strategic roadmap, including the supporting policy actions and governance structures that will guide them into the future. There was an acceleration of such activity in the past two years, and plan sponsors expect continued evolution in the next few years.”
This same Mercer survey found that 70% of survery respondents were likely to transfer some or all of their retirees obligations to an insurance company through the purchase of an annuity in 2019 or 2020.
Earlier this year two companies announced the purchase of group annuity contracts from Pacific Life Insurance Company for the purpose of pension de-risking. In a $370 million transaction, S&P Global transferred its obligations to 4,600 retirees to Pacific Life. Lennox International, the heating and cooling company transferred $100 million in pension obligations to Pacific Life Insurance Company. In 2016, Lennox offered lump-sum buyouts to vested participants. Few details were released about either of the Pacific Life transactions.
Dana Incorporated, the Maumee, Ohio based maker of power-conveyance and energy management solutions for vehicles and machinery has now transferred all liabilities associated with the Dana Retirement Plan, by purchasing group annuity contracts for the remaining plan participants. The company contributed approximately $62 million in cash to the Retirement Plan in order to facilitate the purchase of two group annuity contracts. One contract, purchased from Athene Annuity and Life Company (a subsidiary of Athene Holding Ltd.) will cover all but the New York retirees. New York retirees will receive their pension benefits in the form of annuity payments from Companion Life Insurance Company, a subsidiary of United of Omaha Life Insurance Company. Dana’s retirees will begin receiving payments from the two insurance companies in October, 2019.
Avery Dennison, the global manufacturer and distributor of adhesive materials, apparel branding labels, and specialty medical products headquartered in Glendale, California transferred approximately $750 million of its pension obligations to American General Life Insurance Co. in May 2019. This pension de-risking transfer affects about 8,500 retirees. In July 2018, Avery Dennison terminated its US defined benefit plan, and subsequently contributed $200 million to the plan before making lump-sum buyouts available to certain plan participants, reducing its pension liabilities by about $152 million. In March 2019, the company contributed $7 million to the DBP to cover the costs association with the pension de-risking transfer.
According to the 2019 Pension Risk Transfer Poll sponsored by MetLife, most companies plan to rid themselves of their pension liabilities in the future. Pension de-risking transfers topped $26 Billion in 2018, up 14% from 2017. Pension de-risking since 2012 exceeds $125 Billion. 2019 is on-track to be a big year for pension de-risking. According to LIMRA Secure Retirement Institute pension de-risking transfers (what they term “buy-out” sales) were $4.75 Billion in the 1st Quarter of 2019.
Senator Andrew Gounardes (D. 22nd) has sponsored a “same as” bill – S4864 to accompany A5818 – “AN ACT to amend the insurance law, in relation to providing protection to certain retirees from pension de-risking transactions; and to amend the civil practice law and rules, in relation to statutorily exempt payments” sponsored by Assemblyman Peter Abbate. This bill has been referred to the Insurance Committee. The introduction of the “same as” bill in the New York Senate is very important. In New York State, both the Senate and Assembly must pass a bill before the Governor can sign the bill into law.
Pension de-risking through the purchase of a group annuity contract is a concern to retirees because retirees lose all of the uniform protections intended by Congress under ERISA and their rights become subject to non-uniform state laws. Enactment of legislation at the state level is needed to replace these protections. NY’s proposed legislation will provide those protections to New York retirees impacted by pension de-risking transfers. This legislation will provide basic financial disclosures, protections of annuity benefits from creditors, and reasonable restrictions on subsequent transfers.
The IRS released a new notice earlier this month, which will allow defined benefit plan (DBP) sponsors to once again offer lump-sum buyouts to retirees who are receiving pension benefits. This practice of lump-sum buyouts was effectively halted in 2015 with the release of IRS Notice 2015-49. Prior to the 2015 IRS Notice, DBP’s regularly offered lump-sum buyouts to retirees in an effort to reduce their pension liabilities. Lump-sum buyout’s are lucrative for the DBP’s but are often detrimental to retirees. As stated in Forbes: “The idea of an employer-sponsored defined benefit pension plan is that you (and your spouse) get guaranteed payouts for life. As the plans became a drag on corporate balance sheets, companies started shedding pension liabilities by offering participants the option of taking a lump-sum buyout (cash) or transferring their pension to an insurer who would continue the lifetime payments. For retirees who say yes to the lump-sum offers, it wipes out federal protections of ERISA and turns lifetime retirement income into a one-time chunk that can easily be outlived.”
In its 2018 10-K, Maryland based chemical conglomerate, W.R. Grace & Co. reported that it has purchased a group annuity contract from Prudential Life Insurance Co. of America, transferring $117.4 million in pension liabilities. W.R. Grace recognized a $1.0 million gain on that transaction. Earlier in 2018, W.R. Grace’s U.S. pension plans paid $42.2 million in lump sum distributions to retirees not yet in pay status reducing its pension obligations by $43.5 million and resulted in a $1.3 million gain. W.R. Grace’s defined benefit plan closed to new participants in 2017. The company now sponsors a defined contribution plan for U.S. employees, currently contributing an amount equal to 100% of employee contributions, up to 6% of an individual employee’s salary or wages.