Plan Termination and Its Aftermath: The Case for an Independent Trustee

Employees of companies facing bankruptcy or other financial hardship often experience great personal hardship, such as lost jobs, reduced wages, and lost pensions. While all of these events can be life-altering, the loss of a pension not only can take away what was expected to be a comfortable and secure retirement, but it also foreshadows a very lengthy and uncertain process to determine what is left of the pension.

One question is often critically important to determining just how lengthy and how uncertain that process will be: Who will be responsible for administering what remains of the pension plan? This question is critical because the trustee of a terminated plan exercises a broad array of powers over the remaining plan assets and their allocation, investigates potential financial claims that might be brought on behalf of the plan, brings lawsuits in connection with those claims when appropriate, and generally ensures that the participants receive as large a share as possible of the benefits they earned. The trustee is also responsible for keeping participants informed of the process, providing information upon request, and ensuring that the process is brought to resolution as quickly and as efficiently as possible.

The Employee Retirement Income Security Act establishes a framework for the appointment of the successor trustee. This framework permits the federal agency responsible for insuring the failed pension—the Pension Benefit Guaranty Corporation—to request its own appointment. But the statutory scheme, and particularly the provision authorizing compensation for the trustee, also suggests that Congress did not expect that PBGC would routinely act as the trustee. Nonetheless, since its creation in 1975, PBGC invariably has sought and secured the role of trustee in connection with the terminated pension plans it insures, almost always by agreement with the prior plan administrator. In most cases, plan administrators of the failed plan readily agree to PBGC’s appointment, probably assuming that they have no choice in the matter, and that PBGC will be a competent trustee.

Recently, however, some plan sponsors and pensioners are rethinking whether this practice–routine appointment of PBGC as the trustee of the terminated plan—is a sound one. For example, the union representing a group of plan participants from the US Airways Pilots Plan is currently seeking in the U.S. District Court for the District of Columbia the removal of PBGC as trustee of the terminated plan and the appointment of an independent fiduciary. ¹See US Airline Pilots Assoc. v. Pension Benefit Guarantee Corp., Case No. 1:09-cv-01675-FJS (D.D.C.), filed 9/2/09. In February, the court held a three-day bench trial on the pilots’ allegations, during which the court heard testimony from a number of witnesses regarding the agency’s practices in dealing with its trusteed plans. The court also heard testimony from PBGC’s expert witness (a former general counsel of the agency) who sought to defend PBGC by arguing that, because of PBGC’s conflicting interests, its fiduciary obligations as a statutory trustee are less than the obligations of other fiduciaries.

Indeed, the crux of her argument was that, while independent trustees must act solely in the interests of a plan’s participants and beneficiaries, PBGC by definition cannot do so because it has competing statutory obligations as the guarantor of the failed pension plan and that its fiduciary obligations must therefore be less. The court has not yet issued its ruling, and the plaintiffs have offered a significant amount of legal authority to dispute the notion that PBGC’s fiduciary obligations are less than those of other trustees; nonetheless, it is clear that, however the court rules, plan administrators are now on notice that PBGC believes that it cannot and will not afford plan participants and beneficiaries the same level of fiduciary care that an independent fiduciary would render.

PBGC’s acknowledgment of its limitations in the recent US Airways Pilots litigation is unsurprising, as these failings are structural in nature. PBGC’s insurance program is funded by plan sponsor insurance premiums and, because of this lack of public funding, PBGC is often concerned with its own fiscal bottom line.

By contrast, ERISA makes clear that the statutory trustee is, in fact, a “fiduciary,” whose guiding concern is supposed to be the welfare of plan participants. This creates an inherent conflict because there are many times in the process when the best interests of the participants are completely counter to the financial interests of the agency. One good example of this is when it comes time to estimate the remaining plan liabilities and assets. A true fiduciary would want as accurate an estimate as possible, in order to ensure that the participants get every conceivable penny out of the funds that were contributed by the sponsor for their benefit. PBGC, however, has the exact opposite incentive; any underestimation of plan assets, or overstatement of plan liabilities, works to PBGC’s benefit, at the direct expense of the participants’ rightful share of plan assets.

But apart from this conflict of interest, PBGC’s insistence on serving as the trustee for every terminated plan in the country has created crushing administrative burdens beyond PBGC’s ability to handle. PBGC’s resolution of pension issues can take years and even decades and, even then, their determinations are rife with errors, often as a result of PBGC outsourcing the work to unqualified contractors. These errors have been the subject of numerous critical reports by PBGC’s inspector general, who recently described PBGC’s audit process as “seriously deficient,” noting that systemic problems originally detected in 2007 continue unabated ²See PBGC Office of Inspector General Evaluation Report, PBGC Processing of Terminated United Airlines Pension Plans Was Seriously Deficient, Nov. 30, 2011, at page 22, available at http://oig.pbgc.gov/pdfs/PA-10-72-1.pdf; PBGC Office of Inspector General Evaluation Report, PBGC’s Plan Asset Audit of National Steel Pension Plans Was Seriously Flawed, March 30, 2011, available at http://oig.pbgc.gov/pdfs/PA-09-66-1.pdf). (see the following stories on PBGC inspector general reports 102 PBD, 5/29/12; 39 BPR 1035, 6/5/12; 232 PBD, 12/5/11; 38 BPR 2200, 12/6/11; 74 PBD, 4/18/11; 38 BPR 770, 4/19/11).

Given these structural limitations, it will often be in the best interests of the participants to seek appointment of an independent fiduciary who will not suffer these same distractions or conflicts. And recent developments suggest that prudent pension plan administrators are beginning to do so, realizing that everyone’s best interests can often be served by the appointment of an independent fiduciary without the same conflicts and institutional inefficiencies that plague PBGC. ³To take one example, the administrators of Dewey & LeBoeuf’s pension plan initially rejected PBGC’s demand that they agree to the appointment of PBGC as plan trustee, instead indicating that they would appoint an independent fiduciary to manage the plan during the firm’s liquidation. See Pension Benefit Guaranty Corporation v. Dewey & LeBoeuf LLP, Case No. 1:12-cv-03833-JMF, Dkt. No. 3 (S.D.N.Y, filed 5/14/12, terminated pursuant to consent order 6/13/12). PBGC eventually persuaded Dewey to agree to PBGC’s appointment as trustee as part of a larger settlement of pension issues. Id. at Dkt. Nos. 34-35. In many instances, the case for the appointment of an independent trustee of a terminated plan is a strong one, and it grows stronger with every new indication of PBGC conflict of interest, inefficiency, and mismanagement.