Compliance July 9, 2018

Stock Drop Lawsuit Tied to Allergan-Actavis Acquisition Dismissed

Ruling in favor of a detailed motion to dismiss filed by defendants, the court cites a long list of precedent-setting cases, including the U.S. Supreme Court’s 2014 decision in Fifth Third v. Dudenhoeffer.

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The United States District Court for the District of New Jersey has ruled strongly against plaintiffs in a stock drop lawsuit filed by employees of Allergan in the wake of the firm’s acquisition by Actavis. 

Plaintiffs filed their class action challenge more than a year ago against the Allergan, Inc. Savings and Investment Plan and the Actavis, Inc. 401(k) Plan, claiming breaches pursuant to Sections 404, 405, 409 and 502 of the Employee Retirement Income Security Act (ERISA). According to the initial complaint, the defendants “permitted the plans to continue to offer Allergan Stock as an investment option to participants even after the defendants knew or should have known that Allergan Stock was artificially inflated during the proposed class period,” which ran February 25, 2014, to November 2, 2016.

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Ruling in favor of a detailed motion to dismiss filed by defendants, the court cites a long list of precedent-setting cases, including the U.S. Supreme Court’s 2014 decision in Fifth Third v. Dudenhoeffer. While SCOTUS in that ruling made clear that there should be no special presumption of prudence for employee stock ownership plan (ESOP) fiduciaries, the court also determined that “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 Supreme 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 other stock drop cases argued post Fifth Third v. Dudenhoeffer, the plaintiffs here have flatly failed to meet this high bar for proving standing. For example, on the matter of proving that plan fiduciaries should have known that the employer stock price was inflated, the court concludes bluntly that the plaintiffs’ examples, standing alone, do not rise above the speculative level of misconduct.

“As pled, plaintiffs have not set forth sufficient facts to establish or even infer that defendants engaged in collusive and/or fraudulent activity during the class period such that they could have insider information to that effect,” the decision explains. “Even if defendants had inside information of fraud or collusion, plaintiffs have not met the heightened pleading standard articulated in Fifth Third to maintain a cause of action for breach of the duty of prudence.”

In one interesting section of the ruling, the district court considers plaintiffs’ fourth suggestion for an “alternative action fiduciaries could have taken and would not have viewed as more harmful to the plan than helpful.”

“Plaintiffs propose that at the time of the Actavis-Allergan merger, instead of causing the plan to purchase significant amounts of Allergan stock, defendants could have directed cash assets from the acquisition be placed into the plan’s default investment fund or allocated based upon participant’s instructions,” the decision states. “This alternative action lacks sufficient detail to establish that a prudent fiduciary could not have found that reducing or redirecting purchases of Allergan stock would cause more harm than good, especially at the time of a merger. Furthermore, the Supreme Court in Fifth Third explained that ‘ESOP fiduciaries, unlike ERISA fiduciaries generally, are not liable for losses that result from a failure to diversify.’ Thus, this would not a viable alternative to the extent that it required the fiduciaries to diversify the plan.”

The full text of the lawsuit is available here and includes more detailed consideration of these proof-of-standing matters.

Administration July 9, 2018

June DB Plan Funded Status Virtually the Same as May

However, firms that track DB funded status report 2% gains for the quarter and up to 6% for the year.

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The estimated aggregate funding level of pension plans sponsored by S&P 1500 companies remained level at 89% in June, as a result of an increase in discount rates which was offset by losses in international equity markets, according to Mercer.

As of June 30, the estimated aggregate deficit of $229 billion decreased by $16 billion as compared to the $245 billion measured at the end of May.

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“Funded status was stable in June with a slight increase in discount rates offset by a small decline in equities,” says Scott Jarboe, a Partner in Mercer’s US Wealth business. “Discount rates are up over 50 basis points year to date, which may have made the cost of de-risking strategies, such as an annuity buyout, more appealing to plan sponsors. In addition, we expect many plan sponsors are reviewing discretionary contributions while they can still deduct at the higher corporate tax rates in many cases by September 15, 2018.”

Other firms that track pension funded status measured slight increases in June, with Northern Trust Asset Management reporting that the average funded ratio for corporate pension plans increased from 88.4% to 89.0%. The firm says this was primarily driven by higher discount rates—the average discount rate increased from 3.77% to 3.87% during the month—and negative returns in the equity markets—global equity markets were down approximately 0.5% during the month, while non U.S. equities declined just under 2%, but this decline was muted by an increase in U.S. equities.

According to Aon’s Pension Risk Tracker, S&P 500 aggregate pension funded status increased in the month of June from 87.8% to 88.4%. And, Wilshire Consulting reports that the aggregate funded ratio for U.S. corporate pension plans increased by 0.3 percentage points to end the month of June at 88.7%. Wilshire says the monthly change in funding resulted from a 0.8% decrease in liability values partially offset by a 0.5% decrease in asset values. 

Both model plans October Three tracks at least held steady again last month—traditional Plan A gained 1% while the more conservative Plan B was unchanged during June. Plan A is a traditional plan (duration 12 at 5.5%) with a 60/40 asset allocation, while Plan B is a cash balance plan (duration 9 at 5.5%) with a 20/80 allocation with a greater emphasis on corporate and long-duration bonds.

Quarterly and year-to-date funded status changes

Barrow, Hanley, Mewhinney & Strauss, LLC estimated that the average corporate pension plan funded ratio rose to 88.4% as of June 30, from 86.7% as of March 31. It estimates that pension assets had a 0.9% gain for the second quarter of the year while liabilities were down 1%. Barrow Hanley has estimated the funded status of corporate pension plans sponsored by companies in the Russell 3000 using information disclosed in Securities and Exchange Commission (SEC) Form 10-K and returns for asset class indices for each year-end since 2005.

Legal & General Investment Management America’s (LGIMA)’s Pension Fiscal Fitness Monitor, a quarterly estimate of the change in health of a typical U.S. corporate defined benefit (DB) pension plan, finds the average funding ratio rose from 87.4% to 89.7% during the second quarter of 2018. Over the quarter, global equity markets increased by 0.79% and the S&P 500 increased 3.43%. Plan discount rates increased by 24 basis points, as Treasury rates increased 4 basis points and credit spreads widened 20 basis points. Overall, liabilities for the average plan fell 2.17%, while plan assets with a traditional “60/40” asset allocation increased 0.41%, resulting in a 2.3% increase in funding ratios over the second quarter of 2018.

Ciaran Carr, Senior Solutions Strategist at LGIMA, says, “We continue to see an uptick in demand for more customized strategies to help hedge interest rate risk and lock in funding ratio gains after benefitting from a strong increase in discount rates. Completion management and option-based hedging strategies remain in high demand, while clients continue to move assets into fixed income and synthetically replicate equity exposure. We have also seen an increase in the demand for custom credit strategies, particularly from plans focusing on a pension risk transfer or self-sufficiency strategies.”

The aggregate funded ratio is up 1.5 and 4.1 percentage points for the quarter and year-to-date, respectively, according to Wilshire Consulting.

Year-to-date, the aggregate funded ratio for U.S. pension plans in the S&P 500 improved from 85.6% to 88.4%, according to the Aon Pension Risk Tracker. The funded status deficit decreased by $76 billion, which was driven by a liability decrease of $134 billion, offset by asset declines of $58 billion year-to-date.

For the year, October Three’s Plan A is 6% ahead, while Plan B is up 1%.

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