Latest Developments Avoiding and Defending Challenges to Plan Investments and Other DB Plan Decisions

Transcription

1 Presenting a live 90 minute webinar with interactive Q&A Defined Benefit Pension Plan Litigation: Latest Developments Avoiding and Defending Challenges to Plan Investments and Other DB Plan Decisions TUESDAY, MAY 7, pm Eastern 12pm Central 11am Mountain 10am Pacific Td Today s faculty features: James O. Fleckner, Partner, Goodwin Procter, Boston Sarah Zumwalt, Principal, Groom Law Group, Washington, D.C. The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions ed to registrants for additional information. If you have any questions, please contact Customer Service at ext. 10.

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5 Strafford Teleconference May 7, 2013 Defined Benefit Pension Plan Litigation James O. Fleckner Goodwin Procter LLP This presentation has been prepared as a general discussion of these matters. It is not, and does not attempt to be, comprehensive in nature. It should not be regarded as legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein. Any discussion of U.S. Federal tax law contained in this presentation was not intended or written to be used, and it cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed on the taxpayer under U.S. Federal tax law Goodwin Procter LLP

6 Pension Plans Defined Contribution Plans Fixed contribution; benefit is variable and depends on factors such as amounts invested, earnings (loss), fees Employee bears investment risk Examples: 401(k), ESOPs, 403(b) Defined Benefit Plans Benefit is fixed by the terms of the plan Employer bears investment risk Goodwin Procter LLP 6

7 Constitutional Standing Sprint Commc ns Co. v. APCC Servs., Inc., 554 U.S. 269 (2008) [I]rreducible constitutional minimum requirements: an injury in fact (i.e., a concrete and particularized invasion of a legally protected interest ); causation (i.e., a fairly traceable connection between the alleged injury in fact and the alleged conduct of the defendant); and redressability (i.e., it is likely and not merely speculative that the plaintiff s injury will be remedied by the relief plaintiff seeks in bringing suit). Burden on plaintiff Goodwin Procter LLP 7

8 Defined Benefit Cases Harley v. Minn. Mining And Mfg. Co., 284 F.3d 901 (8 th Cir. 2002) Claims: failing to adequately investigate and monitor plan investment in a hedge fund failing to discover and remedy a prohibited transaction involving the fund advisor's compensation DB plan with a substantial surplus District court held that plan suffered no loss Goodwin Procter LLP 8

9 Defined Benefit Cases Harley v. Minn. Mining And Mfg. Co., 284 F.3d 901 (8 th Cir. 2002) Eighth Circuit affirmed, but on narrower grounds Rejected the no loss to plan rationale Loss of surplus is a plan loss, but not a loss to the participant; the plan sponsor is liable to fund the plan and benefits: the limits on judicial power imposed by Article III counsel against permitting participants or beneficiaries who have suffered no injury in fact from suing to enforce ERISA fiduciary duties on behalf of the Plan. 284 F.3d at 906 (emphasis added). [t]he primary purpose of [ERISA] is the protection of individual pension rights. 284 F.3d at 907 (quoting H.R. REP. No (1974)). Goodwin Procter LLP 9

10 Defined Benefit Cases Harley v. Minn. Mining And Mfg. Co., 284 F.3d 901 (8 th Cir. 2002) Dismissal proper where the Plan s surplus was sufficiently large that the [] investment loss did not cause actual injury to plaintiffs interests in the Plan. 284 F.3d at 907 Surplus is not an affirmative defense Plaintiffs must show an actual injury to themselves. Court found that Plaintiffs have no evidence that the Plan will terminate in the foreseeable future. 284 F.3d at 908 Goodwin Procter LLP 10

11 Defined Benefit Cases McCullough v. AEGON USA, Inc., 585 F.3d 1082 (8 th Cir. 2009) Claims: causing DB plan to pay excessive fees, and committing prohibited transactions by investing in funds offered by affiliates of the sponsor The plan was substantially overfunded Affirms dismissal, following Harley Goodwin Procter LLP 11

12 Recent/Current Cases: David v. Alphin Palmason v. Weyerhaeuser Co.

13 David v. Alphin, 704 F.3d 327 (4 th Cir. 2013) Affirms dismissal of claims relating to defined benefit plan for lack of constitutional standing, rejecting four participant p arguments (some joined by DOL and PBGC as amici): No representational standing because participants had not been contractually assigned rights of the plan. Trust law principles do not extend to confer Article III standing under ERISA where plan is overfunded. No direct injury because (i) a participant i t in a DB plan only has an interest in the benefits due, not the assets of the pension fund, and (ii) given that the employer must make up any shortfall, and PBGC protection is available, injury is too speculative. Deprivation of statutory rights may effect statutory standing, but not constitutional standing. Goodwin Procter LLP 13

14 Defined Benefit Pension Plan Litigation Sarah A. Zumwalt, Principal i

15 Cash Balance Plan Litigation 15

16 Cash Balance Plan Litigation i i What is a cash balance plan? Hybrid plan a DB plan with DC-like features Typical claims: Wear-away Age discrimination Rejected by Courts of Appeals Prospectively dealt with by PPA Anti-backloading Whipsaw issues Notice issues 16

17 Cash Balance Plan Litigation i i Recent cases none particularly significant McCorkle v. Bank of Am. Corp.,, 688 F.3d 164 (4th Cir. 2012). Affirmed district court s dismissal of claims re: normal retirement age and backloading. Osberg v. Foot Locker, Inc., No. 07 Civ. 1358(KBF), 2012 WL (S.D.N.Y. Dec. 6, 2012) SJ to defendant harm arising from cash balance conversion was entirely speculative 17

18 Cash Balance Plan Litigation i i Recent cases (continued) Murphy v. IBM Corp., No. 10 Civ. 6055(LAP), 2012 WL (S.D.N.Y. Feb. 21, 2012). Follow-on from Cooper v. IBM Motion to dismiss granted Looking ahead IRS market rate regulation expected (soon?) 18

19 PBGC Litigation and Developments 19

20 PBGC Litigation and Developments Controlled group/jurisdiction issues When underfunded DB plan terminates, each member of plan sponsor s controlled group is jointly and severally liable to PBGC for the amount of the underfunding, unpaid contributions, and a termination premium. ERISA 4062(a), (b). PBGC v. Asahi Tec Corp., 839 F. Supp. 2d 118 (D.D.C. 2012). Defendant, a foreign corporation, acquired plan sponsor through stock sale. Argued no personal jurisdiction. District Court held there was jurisdiction. D.C. Circuit denied request for interlocutory appeal. 20

21 PBGC Litigation and Developments Early Warning Program (a/k/a Risk Mitigation Program) Statutory t t hook: PBGC may institute proceedings... to terminate a plan whenever it determines that the possible long-run loss of [PBGC] with respect to the plan may reasonably be expected to increase unreasonably if the plan is not terminated. ERISA 4042(a)(4). 21

22 PBGC Litigation and Developments Early Warning Program PBGC Screening Criteria: Plan s current liability exceeds $25 million, and either (1) the company has a below investment grade bond rating, based on the most recent bond ratings published by the major rating agencies, or (2) the plan has unfunded current liability exceeding $5 million, based on the most recent Form 5500 Schedule B figures. 22

23 PBGC Litigation and Developments PBGC examples of transactions that it believes may substantially weaken the financial support for a pension plan: A breakup of a controlled group, including a spin-off of a subsidiary, A transfer of significantly underfunded pension liabilities in connection with the sale of a business, A leveraged buyout, A major divestiture by an employer who retains significantly underfunded pension liabilities, A payment of extraordinary dividends, or A substitution of secured debt for a significant amount of previously unsecured debt. 23

24 PBGC Litigation and Developments PBGC assesses the transaction and appears to consider: Affordability whether the post-transaction sponsor and its affiliates will be less able to fund the plan than the current sponsor and its affiliates; Collectibility whether PBGC would be less able to collect employer liability if the plan were to terminate after the transaction because of, for example, the increased debt, especially secured debt, of the post-transaction transaction sponsor and its controlled group, or because there are fewer solvent entities against which PBGC separately can assert joint and several liability; and Total effect whether h the transaction s combined effect on PBGC s risk and exposure justifies PBGC intervention. 24

25 PBGC Litigation and Developments PBGC may seek protections, including: Additional cash contributions to the plan. Letters of credit to secure promises to make future pension contributions or to secure underfunded pension plan liabilities. Security interests in specific company assets to secure unfunded d pension plan liability. Guarantees by entities leaving the controlled group either to assume the pension plan or to pay for termination liability if the plan sponsor cannot support the plan following the transaction. Assumption of plan sponsorship: requiring a controlled group affiliate of the sponsor of an underfunded plan to become the plan sponsor, so even e though the affiliate ate had no employment e relationship with plan participants. Liability of foreign entities: PBGC occasionally has obtained an agreement that the seller s foreign affiliates would be subject to U.S. jurisdiction for purposes of employer liability under ERISA. 25

26 PBGC Litigation and Developments Agree to the conditions or risk plan termination by PBGC. Termination triggers statutory liability in the amount of plan underfunding measured, according to PBGC, under PBGC s benefit valuation regulation very conservative. Example: PBGC v. Saint-Gobain Corp. Benefits Comm., E.D. Pa. Case No (complaint filed April 18, 2013). 26

27 Plaintiffs Claims Palmason v. Weyerhaeuser Co., No (W.D. WA) Defendants allegedly breached ERISA fiduciary duties by causing or permitting the plan to invest between 80-95% of its assets in alternative investments, including hedge funds, private equity investments, and real estate funds. Fiduciaries allegedly miscalculated the risk and correlation of the targeted benchmark of the alternative investments chosen to generate the alpha, causing the plan to lose $2.4 billion, or 41 percent of plan assets, in Plan became underfunded in Actions were breach of duties and self-dealing (in that surplus would revert to company). Goodwin Procter LLP 27

28 Plaintiffs Standing Arguments Palmason v. Weyerhaeuser Co., No (W.D. WA) Statutory and common-law right to be free from fiduciary breaches. Defendants interpretation t ti of ERISA would allow them to take any risk, and, indeed, gamble away their employees pension savings, so long as Weyerhaeuser has or can raise the money to pay back the trust. (Pltffs Opp. to Mot. To Dismiss, Docket # 180, 12/19/12) Injury to equitable interest in the corpus of the plan. Ninth Circuit cases allowing standing without a showing of injury in cases of ill-gotten profits. Goodwin Procter LLP 28

29 Other Plaintiffs Arguments Palmason v. Weyerhaeuser Co., No (W.D. WA) Harley and McCullough were wrongly decided. Thus, the logic of Harley rests on a fundamental misunderstanding di of the nature of the legally protected interest of Plaintiffs as participants and beneficiaries in the Plan. (Docket # 180) Over/underfunded status does not matter, as right to sue is not dependent on market fluctuations. Allege, in any event, that plan became underfunded in 2008, which also is basis for plaintiffs argument that Harley, McCullough, and David are distinguishable. Plaintiffs have standing to seek equitable and injunctive relief, if not damages. Goodwin Procter LLP 29

30 Pension De-Risking Litigation 30

31 Pension De-Risking Litigationi i Lee v. Verizon Communications, Inc., 12-cv-4834-D (N.D. Tex.). Participants for whom annuities were to be purchased sued to stop the annuity purchase, complaining i that t they would lose the protections of ERISA and PBGC insurance. TRO denied. Amended complaint adds claims on behalf of class of participants who remained in plan claims that plan was not sufficiently funded to purchase annuities under regulations and that purchase violated exclusive benefit rule. Classes certified. Motion to dismiss amended complaint pending. 31

32 Contact Sarah A. Zumwalt (202)

33 James Fleckner (617)