Hartford Settles Pension Charges
Thursday, May 11, 2006
The Hartford Financial Services Group has agreed to pay $20 million to settle charges that it secretly paid brokers to steer pension funds to the insurer's annuities even though they may not have been the best choice.
The charges were brought by attorneys general Eliot L. Spitzer of New York and Richard Blumenthal of Connecticut.
"This investigation shows how payoffs and deception influenced major deals for retirement products," Spitzer said yesterday in announcing the settlement. "This was wrong. But the company at the center of the scandal has acknowledged misconduct, provided compensation for those who were harmed, and implemented reforms that will help protect retirees in the future."
At the heart of the investigation was the relationship between brokers, company pension funds that rely upon brokers for expert advice, and financial-services companies that compete for business from those funds.
Spitzer and Blumenthal charged that by funneling payments totaling $4 million over seven years to the brokers, Hartford was able to sell annuities that were more expensive than competitors'.
"Our prices are not competitive in open bidding situations," a Hartford executive said in an e-mail cited by Spitzer.
Annuities are contracts under which a financial company promises to pay a stream of income to the contract holder, typically for the contract holder's lifetime. Companies that operate traditional pensions but want to freeze or terminate them may buy group annuities from insurers to cover the pensions the companies owe to their workers.
Pensioners were not hurt by the deals, but their employers paid more than they otherwise would have because they did not get unbiased advice, the complaint said.
The complaint accused Hartford of disguising its payments as expense reimbursements.
Hartford neither admitted nor denied wrongdoing, but its chairman and chief executive, Ramani Ayer, said in a statement: "We have apologized to plan sponsors for not having provided full disclosure of the compensation paid. Resolving this matter was important for our company."
A year ago, the Securities and Exchange Commission warned that many of the firms that advise pension and 401(k)-plan sponsors have undisclosed financial ties to the companies whose services they recommend.
More than half the consulting firms in a small sample examined by the SEC were found to provide products and services, such as software and consulting, to money managers and mutual funds at the same time they were helping pension plans choose such providers.
Hartford agreed to pay $16.1 million into a fund that will reimburse pension funds that bought Hartford annuities through the brokers involved. The company also will pay fines of $1.95 million each to New York and Connecticut. It also agreed to various changes in its business practices, including how it compensates brokers.