Updated with correction
Trustees of the American Federation of Musicians and Employers' Pension Fund, New York, have agreed to settle a class-action lawsuit claiming they breached their fiduciary duty by choosing "risky" investments.
The settlement for $27 million was reached March 25 in the case, which was filed in July 2017 against some current and former pension fund trustees, and is pending court approval.
The lawsuit claimed the trustees "chased recovery of lost investment returns by repeatedly gambling on the hope of high investment returns from the highest risk asset classes," including emerging market equities and private equity.
At least $17 million of the settlement will go into the plan to pay benefits. The $27 million does not come from plan assets and would be covered by the pension fund's insurer.
Plaintiffs also won new governance provisions in the settlement. Plan trustees must hire an independent fiduciary for several years to "function in all respects" as a third co-chair of the investment committee, replace investment consultant Meketa Investment Group and hire a new outsourced CIO monitor.
A brief filed by plaintiffs' attorneys Steven A. Schwartz and Robert J. Kriner Jr., of Chimicles Schwartz Kriner & Donaldson-Smith supporting the settlement said it "represents an unambiguous victory for plaintiffs and all AFM pension plan participants. … The evidence obtained in discovery reflected that the trustees breached their fiduciary duties because they made a series of increasingly risky asset allocation bets from 2010-2017."
In a statement, the pension fund trustees said the defendants deny all plaintiffs' claims and noted that the settlement is not an admission of fault. "We have always taken our fiduciary responsibility seriously and acted prudently in the best interests of all plan participants," the statement said.
"In fact, Phyllis Borzi, the former assistant U.S. secretary of labor under President Obama — who was the top government official responsible for enforcing fiduciary obligations ... concluded that the trustees did not breach their fiduciary duty in connection with the plan's asset allocation," the statement said.
Plan participants will receive a notice of the class-action settlement with the details. The trustees said in their statement that they are glad to avoid "a needless, costly and disruptive court battle" so they can continue focusing on keeping the plan solvent.
On Dec. 30, pension fund trustees submitted a Treasury Department application to reduce benefits to avoid insolvency. Under the proposal, about 53% of participants would see no benefit reduction, and 45% would have their benefits reduced up to 19%.The comment period for the application has been extended to April 20.
If approved, the benefit reductions would go into effect Jan. 1, 2021. As of March 31, 2019, the pension fund had $1.8 billion in assets and about $3 billion in liabilities, for a funding shortfall of $1.2 billion and a funding ratio of 60%. The plan paid out $185 million in benefits but received only about $76 million in contributions.
A 2017 statement from trustees said that while the lawsuit was directed at the performance of fund investments, "there are many other causes of the fund's present financial predicament. Many multiemployer pension plans across the nation are struggling with a similar 'perfect storm' of challenging factors" that include baby boomers retiring; more benefits being paid out than contributions coming in; longer payouts as people live longer; and two recessions since 2000.