Pension & Benefits News Rejection of employer’s proposal to facilitate withdrawal from multiemployer fund upheld as in best interests of all plan participants
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Monday, July 6, 2020

Rejection of employer’s proposal to facilitate withdrawal from multiemployer fund upheld as in best interests of all plan participants

By Pension and Benefits Editorial Staff

The trustees of a multiemployer pension fund did not abuse their discretion in rejecting proposals by a contributing employer that would facilitate its withdrawal from the plan and entail mid-contract termination of its contribution obligations, according to a federal trial court in Illinois. The trustees balanced the competing interests of all plan participants and determined that the proposal by the employer to waive its contribution obligations would not be in the overall best interest of the fund.

Multiple proposals to facilitate withdrawal from Fund. Kroger, a nationwide grocery chain, contributed to a multiemployer defined benefit pension plan (Central States, Southeast, and Southwest Areas Pension Fund) on behalf of certain current and retired employees of the company and its subsidiary (Roundy’s). Kroger maintained contributions to the Fund until 2017. However, it made several proposals over the prior 3 years to facilitate its withdrawal from the Fund.

In June 2014, Kroger and the International Brotherhood of Teamsters, which represents Kroger participants for purposes of collective bargaining, approached the Fund with its first withdrawal proposal. Under the proposal, Kroger would establish a separate fund for certain Kroger participants. In exchange for relieving the Fund of its pension obligations to the Kroger participants (representing 8,044 of the Fund’s 407,713 participants), Kroger sought a discharge of its statutory duty to make cash withdrawal liability payments.

The Fund’s trustees rejected the proposal, reasoning, based on an analysis of the financial impact of the proposal conducted by Segal Consulting, that the proposal, while delaying the Fund’s projected insolvency by one month, would also cause the Fund to lose employment base, becoming more leveraged and adding risk, which would only be aggravated if other employers also withdrew from the Fund.

A subsequent modified proposal submitted in April 2015, pursuant to which Kroger pledged to make a lump-sum payment to the Fund if the pension liabilities of Kroger’s current and retired employees did not equal 22 years of withdrawal liability payments, was also rejected. In addition to noting that the proposal would negatively affect the Fund’s net asset balance and reduce revenues, the trustees explained that the proposal would violate the Fund’s policy against facilitating employer withdrawal and actually result in other employers withdrawing from the Fund.

Another proposal submitted in 2016 was similarly rejected. The trustees reasoned that, while the proposed transfer of liabilities would benefit Kroger participants, it would cause injury to non-Kroger participants if the Fund was to forgive Kroger’s cash payment obligations in exchange for Kroger’s promise to remove post-insolvency liabilities that would never be paid.

After reaching an agreement to withdraw from the Fund after September 2017, Kroger was sent a notice and demand for payment of withdrawal liability in January 2018, of $1.029 billion, to be paid in monthly installments of $2,841,001 for 20 years. The Fund eventually settled with Kroger for a lump-sum payment of $467 million. The trustees believed that the settlement payment would delay the Fund’s projected date of insolvency by two months.

Current and former employees of Kroger brought suit, alleging that the Fund trustees breached their fiduciary duties of loyalty and prudence and the duty to monitor under ERISA by rejecting the company’s multiple facilitated withdrawal proposals. The Fund moved for summary judgment, maintaining that the trustees did not abuse their discretion in making the reasoned decision to reject the Kroger initiatives, because they were required as fiduciaries to balance the interests of both Kroger and non-Kroger participants in administering the Fund. The court agreed and granted the Fund’s motion for summary judgment.

Trustees reasonably balanced competing interests. Applying the deferential arbitrary and capricious standard, the court found that the trustees considered relevant information and fully discussed the Segal report, which indicated that the proposal would be to the Fund’s detriment. The trustees, the court concluded, balanced the interests of all plan participants and did not abuse their discretion by failing to consider an important aspect of the problem.

The participants argued that the Kroger proposal would not have harmed the plan. However, the trustees reached a different conclusion, based upon the Segal analysis and their own nonarbitrary predictions. Whether the Kroger proposal would actually have injured the plan was not determinative, the court stressed, as there was no genuine dispute that the trustees considered several sources of input, weighed the risks, and made a choice that benefitted the plan as a whole. Thus, even if the trustees’ decision did not provide the greatest value to the plan, the decision did not constitute an abuse of discretion, as the trustees reasonably believed the Kroger proposal would harm most beneficiaries.

The concomitant challenges to the trustees’ evaluation and rejection of the 2015 and 2016 proposals were dismissed for similar reasons. The evidence did not indicate that the trustees acted imprudently, failed to properly consider and evaluate the proposal or breached their fiduciary duties. A jury, the court averred, could only find that the trustees weighed the competing interests and reasonably concluded that the risks inherent in the proposals outweighed the limited benefit to the Fund.

Source: Campbell v. Whobrey (DC IL).

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