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No Need to Consider Merger Alternative when Terminating Defined Benefit Plan

    Client Alerts
  • June 22, 2007

The U.S. Supreme Court recently concluded that a fiduciary need not even consider, as a method of terminating a single-employer defined benefit pension plan, a union’s offer of allowing such plan to merge into the union’s multiemployer plan.


The case, Beck v. Pace, involved a bankrupt company looking to dispose of numerous defined benefit pension plans, most of which covered employees represented by the union.  While it was determining whether to carry out a “standard termination” of the plans, the union got involved in the discussions and proposed merging the plans into its multiemployer plan.  However, the company discovered that consolidating 12 of the plans into a single plan, terminating such plan, and purchasing annuities to effect the termination would result in $5 million in excess cash reverting to the company.  Thus, it decided to terminate and purchase annuities rather than to merge the plan and convey all plan assets, including the potential reversion, to the union plan.


ERISA allows two methods to finalize a plan termination:  (a) purchase annuities, or (b) “otherwise fully provide all benefit liabilities under the plan” (usually by making lump sum distributions).  Under the second option, the Ninth Circuit earlier held that “neither [ERISA] nor its implementing regulations preclude mergers into multiemployer plans as a method of providing such benefit liabilities.”  On this basis, it upheld the determination that the company breached its fiduciary duty by failing to investigate a merger.  In reversing the Ninth Circuit, the Supreme Court deferred to the PBGC’s position that merger was not a method for terminating a pension plan, and that merger and termination are substantially different.  The Court noted the PBGC’s argument that merger would make original participants and beneficiaries “dependent on the financial well-being of the multiemployer plan” and acknowledged the PBGC’s belief that merger would be riskier to such participants and beneficiaries than a termination through the purchase of annuities.


While this case obviously points out that merger need not be considered when carrying out a standard termination of a defined benefit pension plan, it also highlights issues where a company wears “two hats” – as plan sponsor, where it carries out “settler” functions, and as plan administrator, where it carries out fiduciary functions.  ERISA fiduciary rules apply only to the latter, but issues often arise when the plan sponsor and plan administrator are the same entity and may have a conflict of interest in making certain decisions.  When in doubt, it may be prudent to seek ERISA counsel, or to err on the side of fiduciary rules applying and making an objective, well-considered determination.