On January 9, 2008, the firm’s principal, Bob Klausner, argued before the United States Supreme Court in Kentucky Retirement Systems v. EEOC, Case No. 06-1037. On June 19, 2008, the Court handed down the long-awaited ruling. In a 5-4 decision, the Supreme Court held that the Kentucky Retirement Systems did not discriminate on the basis of age. The majority adopted the argument advanced by Kentucky that the plan was designed based on “pension status” rather than on unlawful age-based criteria.

The Court noted that the plan in place in Kentucky shared common features with Social Security, the Federal Employees Retirement Programs, and a substantial number of state and local retirement systems. It was recognized that Kentucky’s plan design was not structured around an aged-based rationale; that once eligible for normal retirement, disability was no longer available. The Court also noted that while some older workers may have been disadvantaged by Kentucky’s plan, it was equally likely that an older worker would receive more money. Lastly, the majority held that there was no evidence that Kentucky had any motivation involving anti-age bias.

The EEOC filed suit against KRS in 1998. Summary judgment was granted in favor of KRS on the basis that the statute did not intentionally discriminate against older workers. A three-judge panel of the U.S. 6th Circuit Court of Appeals affirmed the dismissal. The EEOC moved for rehearing by the entire fourteen-member court which determined in late 2006 that the statute did discriminate, by a vote of 10-4. KRS requested the U.S. Supreme Court to exercise its discretionary review authority. That request was granted in September, 2007. The question before the Supreme Court was whether any use of age in a governmental retirement plan violates the age discrimination laws.

On September 25, 2007, the United States Supreme Court granted a Petition for Certiorari filed by the Kentucky Retirement Systems to review an en banc decision of the United States Court of Appeals for the 6th Circuit holding the KRS statute discriminated on the basis of age. Under the KRS plan, once a member becomes eligible for an unreduced normal retirement based on years of service or a combination of years of service and age, disability benefits are no longer available. If a member is disabled prior to retirement, the plan imputes years of service needed to get a member to the earliest normal retirement date, but not more than double the years of actual service.

In the briefs, KRS pointed out that in Kentucky, retirement was based on either age or years of service and that age alone was not the determining factor. The EEOC argued that if all other factors except age were equal, a younger person always got either the same or better benefits than an older person. Kentucky countered that this was not correct as an older worker begins membership closer to retirement than a younger worker and therefore is more favorably situated.

The ruling in favor of Kentucky ends more than 10 years of litigation. One of the side effects of that litigation was a reduction in disability benefits for persons hired beginning in 2004. The decision also protects hundreds of other state and local systems which, like Kentucky, make benefit decisions based on pension status, whether or not linked to age. Kentucky was supported in the case by Attorney Generals from 13 states, and several important trade, labor and governmental associations.

Please click here for decision.
Copies of the briefs are available upon request.

In a unanimous decision released by the United States Supreme Court on January 26th, the Court held that outdated beneficiary forms prevail over more recent but conflicting divorce decrees. In so ruling, the Court recognized the importance of following official pension plan documents and forms, even if awarding benefits to a former spouse might not have been intended by the member.

The case involves a private sector ERISA plan for employees of the chemical company, E.I. DuPont. After getting married, William Kennedy, designated his wife as his beneficiary in 1974. When the couple divorced twenty years later, the former wife agreed to surrender all pension rights as part of the resulting divorce decree. As is all too common when forms are not updated, the former wife continued to be listed as the plan beneficiary. The husband listed his daughter as his beneficiary on a new beneficiary designation for another pension plan, but neglected to update the beneficiary form for the DuPont plan at issue. Further complicating matters, the divorce decree purporting to waive the former’s wife’s pension rights was not an official qualified domestic relations order (QDRO).

Upon the husband’s death, the plan relied on the outdated beneficiary form and paid the balance of $400,000.00 to the former spouse. The estate and daughter sued the plan claiming that the divorce decree constituted an enforceable waiver of benefits. Based on a split among the circuits on this issue, the Supreme Court granted certiorari on the question of whether a divorced spouse may waive pension benefits through a divorce decree not meeting the formal requirements of a QDRO.¹

In reaching its decision, the Court relied upon ERISA requirements that plan administrators manage ERISA plans “in accordance with the documents and instruments” governing the plan. The Court also looked to trust law concepts which underlie and inform the federal ERISA statute. Perhaps most importantly, the Court’s reasoning was also motivated by the practical policy of adhering to straight-forward, bright-line rules. While it is true that strict adherence to uniform rules and procedures may undermine actual intent in particular circumstances. Nevertheless, the Court recognized the imperative to minimize the administrative and financial burdens of forcing plans to resolve factually complex and subjective determinations of intent.

Readers should be aware that the DuPont case is not the last word on this topic. The Court left unresolved several remaining questions. For example, the Court observed that it was leaving open the subject of whether a former spouse might be required to surrender windfall benefits to the intended beneficiary. Prior contractual agreements and waivers may thus be enforceable, but not against the pension plan. It should also be recognized that the outcome would have been very different if a QDRO had been entered, in contrast to the inadequate divorce decree.

¹ Governmental plans are generally exempt from ERISA requirements. For that reason, governmental plans are not subject to customary QDRO obligations set forth in 29 USC 1056 et seq.
Kennedy v. Plan Administrator for DuPont Savings and Investment Plan, 2009 WL 160440 (07-636).

View H.R. 710

HR 710 introduced to provide guaranteed funding opportunity
for state and local pensions

On January 27, 2009, Representative Gary Ackerman (D.NY) introduced HR 710.  The purpose of the bill is to encourage state and local retirement plan investment in TARP approved financial institutions.  In return for investment in a class of preferred stock, the retirement plans will receive an 8.5% guaranteed rate of return as well as a guarantee of principal.  The idea is to provide an infusion of non U.S. government capital into the banking system, which can be leveraged by a multiple to create capital for consumer loans.  The investments will be a direct guarantee of the Treasury, rather than a deposit guarantee through FDIC.

The other goal is to provide a guaranteed investment opportunity for state and local plans which have been hard hit by the capital markets.  This will in turn serve to relieve funding pressures on state and local plan sponsors.  Plans are encouraged to contact Congressman Ackerman’s office for more information and to encourage their own members of Congress to support the concept.

Congressman Ackerman has been assisted in this endeavor by this office as well as two highly regarded financial experts on restructuring, Julia Whitehead and Sean Mathis. This team has been working on the concept and its application for several months preceding the filing of the bill.  The following summary of the key points of the bill was provided at the recent Legislative Workshop sponsored by The National Conference on Public Employee Retirement Systems (NCPERS):

To secure additional Tier I capital for the United States banking system from parties other than the Federal Government by providing authority to the Secretary of the Treasury to guaranty certain new preferred stock investments made by public pensions acting in a collective fashion, and for other purposes.

• The “Ackerman Bill” calls for using government support to channel funds from a deep, readily accessible source of private capital — the public pension funds — to banks which can leverage that capital in ways which support governmental measures to right the economy. The target rate for  this investment is currently 8.5 %.
  • The Bill intends to support from $50B – $250B of pension plan monies which will be injected into banks through preferred shares eligible for inclusion in the Tier I capital of participating banks — subject to a guarantee by the Federal Government of the dividends and principal of the preferred.
  • While the banks which receive funds under this bill will be mutually agreed to by Treasury and the pension fund investment fund boards, it is anticipated that preference will be given to stable, regionally and locally based institutions which intend to use the funds to support credit extension through:  expansion of their own loan book;  the purchase of asset backed securities, including those secured by home mortgages, consumer credit card receivables, or student loans, which will facilitate additional lending in those areas; and even acquisition, at the request of the Federal Government, of failing financial institutions which can be stabilized and then grown, supported by the capital provided in this Bill.
• The Bill provides clear benefits to the economy:
  • For the first time in this crisis, substantial private funds will be brought to bear on our problems; the use of a guarantee to attract those funds leverages government resources.Its targeted provision of capital to banks recognizes that the restoration of a functioning banking system is a necessary pre-condition to any recovery.
  • The cost to the government and taxpayers will be mitigated because the government’s involvement is through a guarantee rather than an outright use of funds and given the level at which the capital is injected, and the ability to use it to benefit healthier institutions, there is every possibility much or all of the guarantee will be unused.
  • The returns on the preferred issued subject to this bill will help to offset the losses suffered by public pension funds whose portfolios have been decimated by plunging equity prices and which otherwise must look to local governments and taxpayers, already severely strained by the current economic crisis, to cover their obligations to millions of public employees.