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Technology > Investment Platforms > Turnkey Asset Management

High Court Weighs In On Pensions And Mergers

By Matt Brady

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A merger agreement should not be considered as a form of termination for a retirement plan, and employers do not have a fiduciary obligation to consider merger proposals, the U.S. Supreme Court ruled earlier this month.

In the case Beck v. Pace International Union, No. 05-1448, the Crown Paper Company was, as part of a bankruptcy proceeding, terminating its pension plan under the rules given in the Employee Retirement Income Security Act.

Under ERISA rules, the company was required to ensure that the pension’s obligations to beneficiaries would be met. Crown moved to meet those obligations by buying annuities. Crown discovered that it had overfunded some of its pensions and that buying the annuities could generate $5 million in cash that could be used to repay creditors, according to court documents.

PACE offered instead to merge Crown’s single-employer pension plan into its own multi-employer pension, which would have involved absorbing the company’s pension liabilities as well as its assets. Crown rebuffed the offer, and PACE, along with 2 beneficiaries, sued. The plaintiffs claimed that the company had not conducted the diligent review of the PACE proposal that would be required under ERISA.

According to PACE, the company should have been required to review the offer more fully because the merger would have served as a termination of the plan and thus carried a fiduciary obligation.

Under ERISA, the decision whether or not to terminate a plan is a business decision and does not carry with it the requirements of a fiduciary obligation, Justice Antonin Scalia writes in an opinion for the court.

However, the implementation of that decision, involving the transfer of pension fund assets to an insurer selling the annuities, does, and PACE and its pension fund, the PACE Industrial Union Management Pension Fund, or PIUMPF, argued that their merger offer deserved the same consideration.

“The idea that the decision whether to merge could switch from a settlor to a fiduciary function depending upon the context in which the merger proposal is raised is an odd one,” Scalia writes. “But once it is realized that a merger is simply a transfer of assets and liabilities, PACE’s argument becomes somewhat more plausible: The purchase of an annuity is akin to a transfer of assets and liabilities (to an insurance company), and if Crown was subject to fiduciary duties in selecting an annuity provider, why could it automatically disregard PIUMPF simply because PIUMPF happened to be a multiemployer plan rather than an insurer?”

This issue, however, rested on the foundation of a larger question, Scalia writes.

The question is whether the transfer of a pension plan should be considered a “termination” of that plan, Scalia writes.

The court has ruled that it does not, based on the interpretation of the law by the Pension Benefit Guaranty Corp, which sided with Crown.

The court, Scalia writes, has “traditionally deferred to the PBGC when interpreting ERISA,” and its ruling was based in large part only in determining if the PBGC interpretation made sense in the Crown case.

In short, Scalia writes, “we believe it is.”

The PBGC has determined that a termination of a plan and a merger agreement between plans are different in many ways, not the least of which is that there are different sections in the law for each, Scalia writes.

Scalia writes that the termination of a plan represents the removal of that plan’s assets and liabilities from the PBGC’s coverage, while the merger would simply shift it between different employers and force beneficiaries of the terminated plan to rely on the multi-employer plan’s financial strength.

Interpreting a merger as a termination would also strip the company–Crown, in this case–from reaping the surplus of an overfunded plan, Scalia writes.

“For employers, the ill effects are demonstrated by the facts of this very case,” Scalia writes. “By diligently funding its pension plans, Crown became the bait for a union bent on obtaining a surplus that was rightfully Crown’s.”

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