New York Times
Supreme Court Ruling Favors Employers on Pension
DAVID CAY JOHNSTON
Jan. 26, 1999
Companies do not have to share surpluses in their pension plans with their workers, even if the workers contributed to the plans through money withheld from their paychecks, the Supreme Court ruled unanimously Monday.
Pension experts on the employer side hailed
the decision as either a great victory for management or a confirmation
of established law. Those who represent workers said the decision
showed how a 1974 federal law intended to protect workers' benefits
had been twisted into a tool to restrict those benefits while
The decision came in a case involving Hughes Aircraft and its corporate successors: Hughes Electronics, a subsidiary of General Motors Corp., and Raytheon Co. Other companies that have been named in similar pension litigation include General Electric and Georgia-Pacific.
At issue was a type of defined-benefit, or traditional, pension plan in which both the company and its workers contribute money. About $60 billion of the $2 trillion in defined-benefit pension assets are in such contributory plans, pension experts said Monday.
Money deducted from workers' pay provided about half of the contributions to the Hughes plan before 1986. It was then that the company stopped making contributions because investment gains had created a $1 billion surplus. Workers were required to contribute until 1991, when the company gave them the option of continuing their contributions or switching to a plan in which they made no contributions but stood to receive smaller benefits. The company also started using the surplus to finance pension benefits for new workers, who did not have to contribute to their pensions.
Five retired workers from Arizona sued in U.S. District Court in 1992, saying that because Hughes had made such extensive changes to the plan, it had been effectively terminated. Under the Employee Retirement Income Security Act of 1974, when a plan with a surplus is terminated, workers get a share of the surplus. The workers figured that under a terminated plan their benefits would increase by as much as 25 percent, said their lawyer, Jerome Tauber of Manhattan.
Hughes said that as long as it paid the retirees the benefits they were promised it was free to use the surplus to reduce its pension expenses for other workers.
A federal judge in Arizona threw out the lawsuit, but the 9th U.S. Circuit Court of Appeals ruled that a trial should be held.
Justice Clarence Thomas, who wrote the Supreme Court opinion reversing the appellate court, said the retirees "proceed on the erroneous assumption that they had an interest in the plan's surplus."
What the workers bought with their contributions, the court held, was not a share of the pension plan's investment gains but a guarantee that they would earn a defined benefit based on their years of employment and their salaries.
The 1991 changes to the plan, Thomas wrote, "did not affect the rights of pre-existing plan participants, and Hughes did not use the surplus for its own benefits."
Jay Waks, senior pension partner at the Kaye Scholer law firm in New York, who represents companies in pension disputes, said the decision "is a sterling victory for employers who have overfunded their defined-benefit pension plans." The decision removes any doubt about the freedom of companies to use surplus pension assets as they deem best, he said.
Mark Ugoretz, president of the Erisa Industry Committee, a Washington-based trade organization, was more restrained, saying that the court had "simply affirmed existing law that was understood by everybody except these plaintiffs and their lawyer."
He said that workers who contributed to the plan did not buy the right to bigger benefits if the plan achieved a surplus but rather "the guarantee that they would get paid their promised benefits even if we were in a deep depression."
He estimated that only 5 percent of defined-benefit plans run by individual companies ever had a requirement that workers contribute and that such plans were rare now. "Today a company that wants workers to contribute would probably have a 401(k) plan," Ugoretz said. In 401(k) plans, workers assume all investment risks.
Karen Ferguson, executive director of the Pension Rights Center, a workers' advocacy organization, said the high court had endorsed "one more corporate sleight of hand to siphon off pension plan surplus for corporate purposes instead of requiring that it be used for the employees, who by law are supposed to be the sole and exclusive beneficiaries."
She said the surplus represented, in part, inflated dollars that the workers should receive because their pension checks are in fixed amounts whose value has been eroded by inflation. "The decision is fundamentally unfair," she said.
Norman Stein, who teaches pension law at the University of Alabama, said, "This was a plan funded by the employees with their money, and to say that the employees don't have an interest in their own money is absurd."