WASHINGTON -- A recent Supreme Court decision could signal the end of disputes between employees and employers over the division of surplus pension assets.
The stock market's ascent since the mid-1990s has resulted in hundreds of overfunded pension plans, leading many employers to search for ways to use those surplus assets to pay for other employee benefits that would otherwise have been paid from their general coffers.
But employees and pensioners have contended that a portion of the surplus belongs to them, especially where it was generated through their contributions. The Supreme Court's recent unanimous decision, in Hughes Aircraft Co. and Hughes Non-Bargaining Retirement Plan vs. Stanley I. Jacobson et al., now makes it clear that companies are free to use those surplus pension assets for offering new retirement benefits, such as early retirement programs, or covering more employees than they had originally intended.
Among the companies with pending disputes over surplus pension assets are General Electric Co., AT&T Corp. and Boeing Co. (Pensions & Investments, Nov. 16.)
"This opinion makes it clear that the so-called surplus in a pension plan doesn't belong to any group of participants. It is there for everyone who is allowed to participate in the plan, including new units that might be brought into a plan," said William F. Hanrahan, a partner in the Washington-based Groom Law Group.
A GE spokesman said the company does not comment on pending litigation. An AT&T spokesman also declined to comment, but a denial last month by the U.S. Court of Appeals for the District of Columbia Circuit to rehear the case brought by former AT&T workers, now employed by Lucent Technologies, probably means the end of the AT&T case.
Although AT&T's former employees may still ask the Supreme Court to settle the dispute, it is improbable that the high court would accept the case after its ruling in the Hughes case, sources said. Kent Cprek, partner in the Philadelphia law firm of Sagot, Jennings & Sigmond, which represents employees of all three companies, admitted as much.
The Supreme Court's decision tells employees they should opt for do-it-yourself type retirement plans instead of the traditional pension plans, he said. "The basic message (from the Hughes decision) is that employees should take the money and run by investing it on their own," he said.
The ruling also represents a victory for the Pension Benefit Guaranty Corp. The federal pension insurance agency filed papers supporting the Hughes Co.'s position that it had not terminated its pension plan when it created a new level of benefits for new workers in 1991.
The PBGC had maintained that there is a specific process laid down in the Employee Retirement Income Security Act that companies must follow in order to shut down their pension plans, and a "termination" does not occur if employers do not follow that process.
"The Supreme Court ruled that the Hughes plan was not ended merely because it was amended. The court expressly stated that the provisions of Title IV of ERISA `constitute the sole avenues for voluntary termination' of a pension plan," the PBGC said in a statement.
Lawyers representing pension plan sponsors say that the high court's decision makes it easier for employers to administer defined benefit pension plans by removing any uncertainties associated with federal pension law.
The Supreme Court's decision, delivered by Justice Clarence Thomas, made it clear that in a traditional, defined benefit plan, employers must make good on their promises, irrespective of how well they may fare in investing the pension fund assets.
Mr. Thomas reasoned that, "Since a decline in the value of a plan's assets does not alter accrued benefits, members similarly have no entitlement to share in a plan's surplus -- even if it is partially attributable to the investment growth of their contribution."
This reasoning is what employers have relied on all along, according to Mark J. Ugoretz, president of The ERISA Industry Committee, a Washington group representing large companies.
If there were any doubts earlier about what the law is, the high court's decision made it absolutely clear that employers are free to redesign their pension plans, and use surplus pension assets to pay for a new layer of benefits for a new group of employees.
Changing the Hughes' plan from a contributory plan to a non-contributory plan in 1991 in no way violated federal pension law, Mr. Thomas said in the court's decision. Hughes, now part of Raytheon Co., maintained that it had simply changed its benefit structure, but the retirees argued that doing so in effect terminated the existing plan and created a new one.
Five former Hughes employees had filed a class-action lawsuit seeking a portion of the approximately $1.2 billion surplus from the company's contributory plan, which the corporation used to set up a new, non-contributory pension plan in 1991.
At the same time, the company froze its existing contributory pension plan.
The case arrived before the Supreme Court after a lower court had rejected the employees' claim, but the 9th U.S. Circuit Court of Appeals had ruled in favor of the employees.