Sunday, March 24, 2024

Pensioners Sue Over PEU

Pension plan participants from Lockheed Martin and AT&T sued over transferring their pension obligation to annuity provider, Athene.  Athene is owned by Apollo Global, a giant private equity underwriter (PEU).  

The insurers’ private equity ownership was criticized in the plaintiffs’ complaint, alleging that private equity-owned insurers take on high-risk and high-yield investments to achieve higher returns than traditional insurers. These private equity-owned insurers also tend to charge lower fees than traditional insurers to take on plan liabilities, the complaint states. 

 The complaint against AT&T over its PRT with Athene alleged that 80% of Athene’s pension risk transfer liabilities are reinsured in Bermuda. The Lockheed Martin lawsuit accuses Athene of having a “highly risky offshore structure.”

Apparently these pensioners haven't read Tony Robbins new book, which characterizes private equity as the financial Holy Grail.  

The lawsuit against Lockheed also cited an October 13, 2022, NISA Investment Advisors study evaluating the credit worthiness of major insurers, which found Athene the riskiest of nine major PRT providers.

The plaintiffs also allege that the high risk associated with the investments of private equity-backed insurers are not worth their returns, stating that PE returns are not any better than index fund returns, after fees. 

 “Lockheed Martin failed to select the safest annuity available to provide retirees and beneficiaries pension benefits,” the plaintiffs allege. “Relative to traditional annuity providers, Athene invests in far riskier assets to support participants benefits payments. In a market with no shortage of stable and established annuity providers, no prudent and loyal fiduciary would have offloaded billions of participants retirement savings under the circumstances then prevailing”.

Flash back to February 2023:

Meanwhile, even as some sophisticated private investors rush to get out of private equity, the world’s largest private equity firm, Blackstone, recently reassured Wall Street analysts that state pension officials will continue using retirees’ savings to boost revenues for private equity firms, hedge funds, real estate funds and other so-called “alternative investments”.

...a JP Morgan study in 2021 found that private equity has barely outperformed the stock market, but it remains unclear whether that “very thin” outperformance is worth the risk of opaque and illiquid investments whose actual value is often impossible to determine – investments that could crater when the money is most needed.

Yesterday the Bank of Montreal (BOM) and The Carlyle Group announced a move to offer BOM investors secondary private equity stakes.  What a relief that sophisticated investors have another exit strategy for their unwanted PEU holdings.

Pensioners are right to be concerned about the quality of assets underlying their annuities.  The greed and leverage boys stormed the insurance industry, acquiring insurers and steering their capital into PEU offerings.  

Pension funds had already ratcheted up PEU holdings in an effort to increase returns and decrease any underfunding.  AT&T's pension had 14% private equity.  Lockheed Martin's pension shopped $1 billion of its private equity holdings, selling $600 to $700 million in 2023.

Lockheed shifted pension responsibility to insurers in a number of transactions, the last two with Athene.

Valuing PEU holdings had a voodoo vibe when interest rates were low and affiliate sales easily financed.  Add that sponsors frequently sold holdings to PEU peers for an undisclosed amount and pricing assets got even murkier.  Often the seller, the buyer and the financier were all PEUs.  

For things to be arm's length we'd have to know how many arms are in the deal and any sub-deals.  That's extremely difficult in our PEU world where politicians Red and Blue love PEU.  Maybe we will see where judges fall in that spectrum.