Data and Research June 14, 2016

State Pension Plans Underwent Many Changes Since 2008

Nearly every state reduced benefits, increased employee contributions, or both.
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The period between 2009 and 2014 marked the greatest period of change in the history of public pensions, according to a new report from the National Association of State Retirement Administrators (NASRA), “Significant Reforms to State Retirement Systems.”

Following the Great Recession of 2008, nearly every state reduced benefits, increased employee contributions, or both. Most of the reforms transferred a higher share of the risk associated with providing retirement benefits from the state or local government to its employees. A number of states employed self-adjusting features that did not require legislative changes but nevertheless altered financing and benefit levels. In some cases, these automatic adjustments were more significant than legislative pension reforms.

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Thirty-six states increased the amount that employees are required to contribute to the pension plan, and 29 states increased length-of-service eligibility requirements for full retirement benefits, which typically took the form of an increase in age, years of employment, or a combination of both to qualify for retirement.

As the report notes, “The global stock market crash sharply reduced state and local pension fund asset values, from $3.2 trillion at the end of 2007 to $2.1 trillion in March 2009, and due to this loss, pension costs increased. While a few states retirement plans prior to the recent reforms did not have mandatory employee pension contributions, nearly all now have this requirement. Generally, plans that were more poorly funded enacted reforms that were more comprehensive than states that were well funded.”

The full report, which details changes in all 50 states, can be downloaded here.

Compliance June 14, 2016

Third Time’s a Charm in Lehman Brothers Stock Drop Suit

In its third visit to the 2nd Circuit, an Employee Retirement Income Security Act (ERISA) lawsuit was decided in favor of Lehman Brothers.
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The 2nd U.S. Circuit Court of Appeals has agreed with a lower court’s decision that participants in Lehman Brothers’ retirement plan did not plausibly argue that the company breached its fiduciary duty by keeping company stock in the plan when it was not prudent to do so.

In 2013, the 2nd U.S. Circuit Court of Appeals upheld an earlier ruling by the U.S. District Court for the Southern District of New York to dismiss the case of Rinehart v. Akers. That ruling was based on the presumption of prudence established in a 1995 decision in Moench v. Robertson. However, following the U.S. Supreme Court’s decision in Fifth Third v. Dudenhoeffer, invalidating the presumption of prudence, the Supreme Court sent the case back to the 2nd Circuit, which then sent the case back to the district court.

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The appellate court noted that while the Supreme Court made clear in Fifth Third that there should be no special presumption of prudence for employee stock ownership plan (ESOP) fiduciaries, “allegations that a fiduciary should have recognized from publicly available information alone that the market was over- or under-valuing stock are implausible as a general rule, at least in the absence of special circumstances.” In addition, for claims alleging a fiduciary breach based on non-public information, the high court held that plaintiffs must plausibly allege an alternative action fiduciaries could have taken and would not have viewed as more harmful to the plan than helpful.

As in the courts’ earlier decisions, the 2nd Circuit rejected the plaintiffs’ argument that their case included “special circumstances,” pointing to Securities and Exchange Commission (SEC) orders issued in July 2008 prohibiting the short-selling of securities of certain financial institutions, including Lehman.  The appellate court also rejected the plaintiffs’ argument that had the retirement plan committee conducted an appropriate independent investigation into the riskiness of Lehman stock, it would have uncovered non-public information revealing the imprudence of investing in the stock. In addition, the 2nd Circuit agreed with the district court that the complaint does not plausibly plead facts that show a prudent fiduciary would not have viewed disclosure of non-public information or ceasing to buy Lehman stock as more likely to harm the plan than help it, as dictated by the Fifth Third decision.

The latest opinion from the 2nd Circuit is here.

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