RICHARDSON, Texas -- Furr's/Bishop's Inc., the large cafeteria chain operator, has become the first employer to settle a class-action lawsuit over a cash balance pension plan.
The case also marks the first time pension plan participants prompted IRS officials to reconsider their decision to approve a cash balance conversion.
In previous suits brought over cash balance plans, the employers generally have prevailed. Most recently, a federal court threw out a suit filed by a group of former Georgia-Pacific Corp. employees that had claimed miscalculations of lump-sum benefits (Pensions & Investments, April 5).
In the preliminary settlement of Robert H. Aull et al. vs. Cavalcade Pension Plan, Furr's/Bishop's agreed to contribute $2.575 million to its plan to fund increased benefit payments for pensioners and employees.
Kmart Corp., which owned Furr's/Bishop's before selling it to Cavalcade Holdings Inc. in a 1986 leveraged buyout, agreed to contribute $700,000 to the Cavalcade pension plan. (The company took the Furr's/Bishop's name when it went public in 1996.)
Furr's/Bishop's also agreed to ensure any lump-sum payments will be equivalent to the present value of pensions payable at retirement age. The employer also agreed to give workers taking a lump sum between 20% and 40% of the value of an early retirement subsidy.
The pension plan had up to $12 million in assets when it was converted to a cash balance plan in the late 1980s. The pension plan reported $10.6 million in assets in its 1995 annual financial statements, according to Judy Diamond & Associates, a Washington-based research firm.
The dispute arose when the company submitted a March 31, 1995, request to the IRS retroactively seeking approval of its pension plan to comply with tax law changes in 1986. The company, which had converted to a cash balance pension plan in 1987, already had received determination letters from the IRS in 1988 and 1991, when it had made some amendments to the plan, and now sought a third one.
As is typical, the IRS solicited comments on the company's request. In 1997, based on the comments, the IRS began auditing the pension plan's 1994 financial returns, postponing granting the company's request until it had completed its examination.
Robert H. Aull, a former employee and plan participant, was among those who had asked the IRS to delay the company's determination letter request. He filed a class-action lawsuit against the company, its pension plan committee and Kmart in a U.S. District Court in Colorado.
The lawsuit alleged the company shaved Mr. Aull's pension benefit by more than one-third by failing to credit interest to his cash balance account when it froze the plan in 1989.
The lawsuit also charged the company secretly changed the way it computed benefits and did not tell participants about plan amendments. The lawsuit charged the company with fraud and breaching its fiduciary responsibilities under federal pension law. It also contended Kmart did not transfer sufficient assets to the pension plan at Cavalcade Holdings after selling the cafeteria operations.
As a result of the IRS audit, the company agreed to changes its pension plan. And, although Furr's/Bishop's and Kmart disputed the allegations in the suit, they reached an out-of-court settlement last month in the class-action suit, based on the IRS-agreed changes to the plan.
Under the agreement with the IRS, the employer agreed to recalculate lump-sum payments, to use the PBGC interest rate in calculating cash balance plan participants' opening account balance, and to use at least a 6%interest rate to credit participants' account balances each year.
In a statement, Phil Ratner, chief executive of Furr's/Bishop's, said the company is "relieved to put this expensive and time-consuming litigation behind us."
Furr's/Bishop's attorney Robert W. Rachal, partner in the New Orleans law firm of McCalla, Thompson, Pyburn, Hymowitz & Shapiro LLP, said, "A lot of companies with cash balance plans have a frozen plan. There really wasn't much IRS guidance (on what interest rates to use) and we accepted the IRS guidance."
Attorney William K. Carr, partner in the Denver law firm of Smith and Carr, represented participants in the class-action suit. He said the settlement shows a "determination letter (from the IRS) is no protection for an employer from a lawsuit brought by employees seeking greater benefits because of alleged violations" of the Employee Retirement Income Security Act.
Another lawyer, who declined to be identified, said participants' ability to force a settlement by intervening with the IRS is "scary."
The settlement is subject to confirmation by an independent actuary and approval by members of the class. It also includes payment of $1.3 million in legal fees, and $25,000 to an outside actuary.