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.