Academic journal article Monthly Labor Review

Pension Plans

Academic journal article Monthly Labor Review

Pension Plans

Article excerpt

Pension Plans In 1986, the LTV Corporation and many of its subsidiaries sought protection from their creditors by filing petitions under Chapter 11 of the Federal bankruptcy laws. (12) A major reason for these actions was LTV's nearly $2.3 billion liability for three underfunded defined benefit pension plans sponsored by one of its subsidiaries, LTV Steel Company, the Nation's second largest steelmaker. (13) By filing bankruptcy petitions, LTV sought to restructure these, and other, obligations while continuing in business.

As part of its reorganization strategy, LTV notified the Pension Benefit Guaranty Corporation, a public corporation created by Congress to provide mandatory insurance coverage for private-sector defined benefit pension plans, of its difficulties. (14) The Pension Benefit Guaranty Corporation, whose insurance provided coverage for all but $200 million of LTV's $2.3 billion in unfunded liabilities, reviewed the situation and concluded that its ultimate liability as an insurer could increase by several hundred million dollars if it did not terminate LTV's plans quickly. (15) Thus, early in 1987, it terminated the three plans and assumed their assets and liabilities. (16)

Although most benefits payable under the plans were guaranteed by the Pension Benefit Guaranty Corporation, some were not. (17) To make up for the lost benefits, the steelworkers' union negotiated a new, much more limited, "follow-on" pension plan with LTV. Thus, although LTV would fund only the follow-on plan, its employees and pensioners would be able to combine payments under this plan with payments from the Pension Benefit Guaranty Corporation and thereby receive nearly the same benefits they would have received under the terminated plans. In effect, the insurance program was being asked to finance a major portion of LTV's reorganization by assuming most of the steelmaker's enormous pension liabilities.

The Pension Benefit Guaranty Corporation, however, concluded that the new plan amounted to an abuse of the insurance system. As a result, it issued an order restoring the three previously terminated pension plans and requiring the company to administer and fund the plans again. (18) To support this action, the Pension Benefit Guaranty Corporation relied on section 4047 of the Employee Retirement Income Security Act which allows it to restore a previously terminated plan in any case in which it determines such action to be appropriate and consistent with its statutory duties. (19) LTV refused to comply with the restoration order, forcing the public corporation to seek enforcement in Federal court. (20)

In the next-to-last week of its recently completed term, the Supreme Court ruled, in Pension Benefit Guaranty Corp. v. LTV Corp., (21) that the Pension Benefit Guaranty Corporation exercised its broad authority properly under section 4047 when it restored the three plans. The Pension Benefit Guaranty Corporation's policy prohibiting abusive follow-on pension plans, the Court held, is rational and consistent with the broad purposes of the Employee Retirement Income Security Act. Further, because section 4047 does not clearly prohibit the Pension Benefit Guaranty Corporation from making restoration decisions based on the existence of follow-on plans, its judgment is entitled to deference.

Justic Harry Blackmun, who wrote the opinion for the LTV Court's 8--1 majority, found the Pension Benefit Guaranty Corporation's policy to be rational because it encourages employees to object strenuously to employer actions that are likely to result in pension plan terminations. Employee resistance, he wrote, can be an important check against plan terminations and may be encouraged. Justic Blackmun also indicated that if abusive follow-on plans are prohibited, fewer pension plans might be terminated. This, the Court agreed, might further two of the Employee Retirement Income Security Act's important goals: Encouraging voluntary private pension plans and maintaining low premiums. …

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