New York Times
Supreme Court Ruling Favors Employers on Pension
DAVID CAY JOHNSTON
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 enriching corporations.
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."