Before we get into it, a reminder that paid subscribers get exclusive access to my podcast series, Net Interest Extra, where I interview experts in the field of finance. This week I released a recording with Davide Serra, founder and CEO of Algebris Investments. We talk European banks and investing lessons from 20 years managing money. Also, if you haven’t yet read it, my Ode to America was a big hit and a joy to write. If you’re not already fully subscribed, you can do so here.

Now to today’s topic.

Like many American companies, Lockheed Martin spent many years juggling two businesses. For most of that time, its core business – aerospace and defence – performed well, with staff of around 120,000 contributing to revenues of over $70 billion. Its pension business, by contrast, performed less well. Many of its employees, past and present, were on defined benefit pension plans and the company ran out of funds to satisfy them. By the end of 2020, Lockheed Martin’s pension liabilities exceeded the value of the assets it had put aside to fund them by more than $12 billion.

To reduce its funding risk and free it up to focus on making F-35s, Lockheed Martin decided to tap the pension risk transfer market. This market has grown strongly over the past decade and a half. It allows pension providers to offload risk to insurance companies who assume full responsibility for future benefit payments. Lockheed Martin chose Athene, owned by Apollo Global Management – a firm we’ve discussed many times here before. In 2021, it transferred $4.9 billion of pension obligations over to Athene, covering 18,000 employees and retirees, and in 2022 it followed up with another $4.3 billion covering 13,600 pension holders.

For Athene, pension risk transfer became big business. The company entered the market in 2017 after establishing a successful franchise in retail annuities. To date, it has done 49 deals similar to the Lockheed Martin ones, worth $52.7 billion. At the end of 2024, the business accounted for around 11% of its total reserves.

But not all Lockheed Martin plan participants were happy and in March 2024, they filed a class action lawsuit. One of the lead plaintiffs is Stephen Schwarz, a resident of Marietta, Georgia, who retired in 2020 after 25 years of service, most recently as a sustainment manager. Unlike his namesake, Stephen Schwarzman, he is not a fan of private equity’s encroachment into the pension industry. His lawyers complain that private equity firms control over 7% of assets in the life and annuity industry – a number that has since gone up to 11%.

It’s a trend Apollo kicked off in 2009 when it launched Athene and it has only gathered momentum since. According to the American Council of Life Insurers, Athene is now the ninth largest life insurer in the US; in its core business of annuities, it is number one.

Nor are Apollo’s ambitions restricted to America. This month, its European affiliate, Athora, paid £5.7 billion to buy the UK’s Pension Insurance Corporation (PIC), which, like Athene, takes over corporate defined benefit pension plans. PIC has consistently absorbed over 15% of the bulk sales that have come onto the market in the UK, taking over responsibility for pensions from companies such as Next, De Beers (UK) and British American Tobacco. It now manages pensions for 400,000 individuals (nearly as many as the 550,000 that Athene has transferred over in the US), sitting on £51 billion of assets. It was previously partially owned by private equity; now that grip grows tighter.1

In their complaint, Stephen Schwarz’s lawyers lay out a number of objections. Chiefly, they allege that the transfer strips plan participants of protections they were previously eligible for under the Employee Retirement Income Security Act of 1974 (ERISA) in the event the sponsor becomes insolvent.2

They contend that Athene is especially risky because it is “a private-equity controlled insurer with a highly risky offshore structure” and that “the mission of private equity does not align with the best interest of policyholders”.

Even though it is Lockheed Martin they are suing rather than Athene or Apollo, they know what precedent to invoke to rattle the cage. “The collapse of Executive Life in the early 1990s demonstrates the potentially catastrophic consequences of high-risk insurance practices,” they write. “Executive Life, led by an aggressive money manager, invested in risky junk bonds with high interest rates, which allowed them to make higher payouts to policyholders.”

The source of those junk bonds? Apollo’s founders, then part of Michael Milken’s brokerage operation at Drexel Burnham Lambert. “Apollo executives contributed to the collapse of Executive Life,” the lawyers claim.3

The link back to Executive Life is a stretch, but Stephen Schwarz and his fellow plaintiffs have identified something real: private equity’s transformation of the insurance industry. What started as opportunistic investing during the 2008 crisis has evolved into a sophisticated financial machine that blurs the lines between asset management, insurance and banking. The question is whether this complexity creates new risks or simply redistributes old ones. To find out more, read on.