Pension Plans: Supreme Court Restores Employer Discretion Over Surplus Assets

Because of the huge stock market gains in recent years, many defined benefit pension plans contain more assets than are needed to pay out benefits. Since 1997, however, a ruling from the federal appeals court that covers California has sharply limited employers’ discretion in how to use that “extra” money. But in a recent unanimous decision, the U.S. Supreme Court overturned the earlier case and gave employers new flexibility in handling surplus pension funds.

Employer Uses Part Of $1 Billion Surplus

The case was brought by a group of Hughes Aircraft retirees covered by a defined benefit pension plan. The plan promised retired employees a specific monthly pension, and both employees and Hughes made contributions to it.After the fund grew to $1 billion more than was needed to pay out the required benefits, Hughes stopped contributing while employees continued to pay into it. Hughes then used part of the surplus to fund an early retirement program that included employees who hadn’t participated in the original plan.

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Retirees Claim Vested Interest

The retirees sued, claiming Hughes violated the Employee Retirement Income Security Act (ERISA) by using the extra money to benefit itself and workers who weren’t participants in the plan. Hughes said funding its early retirement program was perfectly legal and asked to have the lawsuit dismissed. In an initial set-back for employers, the federal Ninth Circuit Court of Appeal sided with the retirees.

Employer Free To Use Surplus

The U.S. Supreme Court reversed the Ninth Circuit’s decision, holding that plan participants have no legal interest in the plan’s surplus. Unlike defined contribution programs in which an employee receives whatever level of benefits the investments generate, defined benefit plans provide a predetermined retirement payout-regardless of whether the plan performs well or poorly. Plus, with defined benefit plans there is a general pool of assets, rather than individual dedicated accounts, and the employer, not the employee, bears the risk if the fund loses money.Therefore, according to the court, the excess funds in Hughes’ defined benefit plan don’t belong to the employees who contributed to the fund, and it was within the company’s discretion to use the money to pay for an early retirement program-even if the company indirectly benefited from the program by lowering its labor costs. Although the surplus must still be used to benefit “plan participants,” it can fund benefits for employees who did not originally contribute to the plan. And the court confirmed that employers can amend defined benefit plan terms, regardless of whether contributions are made by the employer alone or jointly with workers.


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