Verizon Communications Inc.'s innovative pension de-risking arrangement in which it is shedding billions of dollars in pension plan liabilities violates federal law, a lawsuit alleges.

Under that arrangement, Verizon will transfer about $7.5 billion in benefit obligations to Prudential Insurance Co. of America by purchasing a huge group annuity from Prudential. The agreement covers some 41,000 management participants who retired and began receiving benefits before Jan. 1, 2010.

But a lawsuit filed Tuesday in U.S. District Court for the Northern District of Texas by several plan participants charges that the transaction runs afoul of the Employee Retirement Income Security Act.

“Short of a standard termination of the plan approved by the (Pension Benefit Guaranty Corp.), “ERISA simply does not permit a transfer of Verizon's pension payment obligations to plaintiffs and the putative class of retirees to an insurance company, and the consequential canceling of Verizon's obligation to pay PBGC required annual premium payments on account of such participants,” according to the suit.

In addition, the transaction “will effectively eliminate all of the transferred retirees' ERISA protections for their pensions, including the uniform safety net presently provided by the PBGC,” the suit said.

A top Verizon executive said the suit is without merit.

“Verizon's actions regarding its pensions protect the interests of our retired management employees. The monthly pension benefits of the retirees receiving an annuity from Prudential will remain unchanged,” Randal Milch, Verizon executive vice president and general counsel in Basking Ridge, N.J., said in a statement.

%%BREAK%%

“Prudential is providing an irrevocable commitment to make all future annuity payments, and this promise will be supported by the extra protection of assets being placed in a separate account at Prudential dedicated to Verizon retirees,” Mr. Milch added.

GM model

Verizon's move to reduce pension plan risk follows that of General Motors Co., which this year said it would purchase a group annuity — also from Prudential — to cover the benefits of tens of thousands of salaried employees who retired before Oct. 1, 1997. GM also gave salaried employees who retired after Oct. 1, 1997, but before Dec. 1, 2011, a choice of taking a lump-sum benefit or continuing their monthly payments. About 30% opted to convert their annuity to a lump sum, GM said. Those who continue monthly payments, though, will receive them from Prudential rather than from GM's pension plan.

Experts have said more employers will take such actions. Through purchasing an annuity and transferring the benefit obligations to an insurer, employers will save on costs such as premium payments to the PBGC, as well as fees and costs associated with offering and administering their pension plans.

In addition, employers taking such actions no longer will be exposed to fluctuating interest rates and investment results that can cause major changes in their pension plans costs and contributions.