The new wave of litigation on pension and annuity products.

One thing i've noticed is that there is a great awakening occurring in the legal and financial community as regards the concept of fiduciary responsibility, compensation disclosure and questionable sale practices as regards retirement and annuity assets.

Today's Boston Globe online has an article by Scott Burns on a class action law suit, the first of many, filed by the firm of Schlichter, Bogard & Denton, a firm out of St. Louis, against defense contractor Northrop Grumman. The complaint essentially alleges that the firm and it's pension plan administrator and investment committee have breached fiduciary duty for failing to fulfill it's responsibility to make certain that the 401(k) plan that is the foundation of the company retirement options for employees operates with appropriate expenses. Similar suits have been filed against Bechtel, Caterpillar, General Dynamics, International Paper and other big name firms. It is an intriguing article for both financial professionals and attorneys alike.

What does this have to do with settlement annuities and other financial products? Well, lets take a look at the landscape over the last 30 months in the U.S. financial and insurance markets. We have seen the market timing scandal against Putnam funds and others explode into a major humiliation for the mutual fund industry and bring to light the long standing practice of self dealing for preferred customers of certain brokerage and mutual fund firms. All of this happening in funds ostensibly being managed for the benefit of fund holders or pension plans. You then have the subsequent revelations of self dealing among many of the major casualty insurance firms, leading to the stunning removal of Hank Greenburg at AIG as the most notable name impacted by the investigations. You have the less publicized but equally important settlements and investigations of Hartford Insurance Group and their group annuity business that was fined for providing "extra compensation" for a subset of brokers who sold their product to fund Pension Plan terminations even though it wasn't the most competitively priced.

All this, plus lets not forget that the Macombers vs Travelers case is still out there, as is the Spencer vs Hartford litigation, both focusing on the issue of rebating commissions and undisclosed steering or incentive programs that might have financial injured the annuitants in settlement cases.

This has not gone unnoticed by trial lawyers, regulators such as the SEC and NASD, and various state attorney generals. We are about to see a major, massive shift in enforcement of rebating, questionable sales tactics, undisclosed compensation agreements and generally how annuity, insurance and investment professionals work on large cases. In our industry of structured settlements, many people still aren't aware that Met Life earlier this year now requires a compensation disclosure form be provided to the owner on each case written. As the owner is typically Met Life's assignment company, Tower, it's largely symbolic and done for compliance reasons only, but we aren't very far from being in a world were it will be mandatory to have records in each case showing every annuity bid, every daily rate, every underwriting decision and our compensation on each product sold. I personally already do this as I have to do it routinely in my securities and variable annuity sales, but I am quite certain that i'm in the minority among settlement professionals in having this material available on every case.

The world of full and complete disclosure to the claimant and his trial lawyer is coming, and the quicker our industry moves toward a standard the less painful the transition will be. Government and legal overkill will be swift and brutal but the snowball has started rolling and it's picking up steam.  

Posted on October 8, 2006 .