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Pension plans.

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.

Finally, the Court held that when the Pension Benefit Guaranty Corporation makes a decision to restore a previously terminated plan, it is not required to consider and discuss other labor and bankruptcy laws. (22) The "specific and unambiguous mandate" of section 4047, Justic Blackmun said, is for the Pension Benefit Guaranty Corporation to take actions that are "appropriate and consistent with ... this title," which refers to Title IV of the Employee Retirement Income Security Act, not other laws. (23) In addition, requiring agencies to take into account considerations that are not pertinent to their statutory duties might cause many more agency decisions to be challenged and invalidated in the courts. "We are not entirely sure," Justic Blackmun wrote, "that [this] makes good sense as a general principle of administrative law." (24)

(12) See Pension Benefit Guar. Corp. v. LTV Corp. (In re Chateaugay Corp.), 87 Bankr. 779 (S.D.N.Y. 1988). 11 U.S.C. $S 1101 (1988) (Chapter 11 of the Federal bankruptcy laws).

(13) 87 Bankr. at 785. LTV Steel Company came into existence as a result of the merger of Jones & Laughlin Steel Company, Youngstown Sheet & Tube Company, and Republic Steel Corporation. Id. According to the district court that considered LTV's bankruptcy petition, LTV merged the three steel companies to make them more efficient by combining some operations and closing down other old and outdated ones. Id. at 786. This merger caused massive layoffs, and many workers retired early, which dramatically increased LTV's pension liabilities. The district court noted that by 1986, LTV Steel Company had more than 77,000 retirees and fewer than 25,000 active workers. Id.

(14) The Pension Benefit Guaranty Corporation was created when the Employee Retirement Income Security Act of 1974 was enacted. Pub. L. No. 93-406, $S 4002, 88 Stat. 1004 (codified at 29 U.S.C. $S 1302 (1988)). The Pension Benefit Guaranty Corporation's statutory purpose is to encourage the use of voluntary private pension plans, to maintain insurance premiums at levels appropriate to its mission, and to provide for the uninterrupted payment of pension benefits to participants of certain defined benefit pension plans that have been terminated. 29 U.S.C. $S 1302(a) (1)-(a) (3) (1988).

A defined benefit pension plan is a plan under which retirees receive a fixed pension, often based on factors such as the length of their service. Actuaries take into account many complex considerations in determining the amount of contributions that are needed to fund these plans.

Defined contribution pension plans, which are not insured by the Pension Benefit Guaranty Corporation, are different from defined benefit pension plans. A defined contribution plan provides a retiree with a pension based solely on the amount of money that has been contributed to the retiree's account and the account's earnings and losses. See 29 U.S.C. $Z 1002(34)-(35) (1988).

(15) One important concern of the Pension Benefit Guaranty Corporation was related to the precarious condition of the steel industry in the United States. As more and more plants closed their doors as a result of a slowdown in the industry, LTV Steel Company's pension plans were expected to incure additional liabilities for shutdown benefits. By terminating LTV's pension plans before company plants closed, the Pension Benefit Guaranty Corporation could avoid assuming these additional liabilities.

(16) The Pension Benefit Guaranty Corporation can terminate a defined benefit pension plan if it decides that (1) the plan does not meet minimum funding standards; (2) the plan will be unable to pay benefits as they come due; (3) a certain distribution of plan assets has been made to an owner, and, as a result, the plan has nonforfeitable benefits that are not funded; or (4) its possible long-term losses from the plan will increase unreasonably if the plan is not terminated. 29 U.S.C. $S 1342(a) (1988). The Pension Benefit Guaranty Corporation terminated the three LTV plans because it expected the plans to incur increased long-term losses.

(17) 87 Bankr. at 788.

(18) Id. at 792.

(19) 29 U.S.C. $S 1347 (1988).

(20) 87 Bankr. at 792.

(21) 110 S. Ct. 2668 (1990).

(22) The Court of Appeals for the Second Circuit had ruled earlier in the case that the Pension Benefit Guaranty Corporation's action restoring the plans had been improper, in part because it had attached too little importance to labor and bankruptcy laws, while relying too heavily on the Employee Retirement Income Security Act. Pension Benefit Guar. Corp. v. LTV Corp., 875 F.2d 1008 (2d Cir. 1989).

(23) 110 S. Ct. at 2675, citing 29 U.S.C. $S 1347 (1988).

(24) 110 S. Ct. at 2676.

"Significant Decisions in Labor Cases" is written by Craig Hukill, an attorney in the Office of the Solicitor, U.S. Department of Labor.
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Title Annotation:Significant decisions in labor cases.
Author:Hukill, Craig
Publication:Monthly Labor Review
Date:Oct 1, 1990
Words:1405
Previous Article:Private Pensions and Employee Mobility.
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