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Are Public Pension Plan Trustees at Risk for Fiduciary Liability When Public Plans Are Underfunded?

It comes as no shock that as our economy struggles to rebound from recession and a record number of individuals reach retirement age, pension plans are feeling the squeeze.  Public pension plans, in particular, face unprecedented pressures.  Reports of states struggling to fund public pension plans have become commonplace. 

Earlier this year, Bloomberg reported that twenty states either skipped or under funded their pension plans from 2007 to 2009 based on a report by Chicago-based Loop Capital Markets.  Government officials are desperately searching for ways to reduce such shortfalls and provide long-term solutions to ailing pension plans.  New Jersey’s Governor, Chris Christie, made headlines when he proposed curbing pension benefit increases, raising the retirement age and suspending cost-of-living adjustments in the state’s pension plan for retired teachers and government workers to help make up for that state’s shortfall.  He has taken his reform initiative one step further by issuing the state legislature an ultimatum:  pass the reform measures or he won’t contribute the actuarially required annual contribution of approximately $3 billion to the system.  

His position is interesting in that it was the failure by past administrations to pay some or all of the annually required contributions that contributed to the position the New Jersey pension system is in today.  Other states have proposed similar solutions, albeit without the threat of withheld contributions.  When governments fail to pay annual required contributions, not only do they jeopardize the actuarial soundness of the funds, but they also put pension plan trustees in a precarious position.  The shortfall in some public pension plans’ funding, and some of the actions that led to it and/or are now being considered, raise serious questions:  Could a government’s failure to pay annual required contributions to its pension plan result in fiduciary liability for the plan’s trustees?  Does fiduciary duty obligate the trustees to take action to compel a government entity to pay its required contribution?  If the answers to these questions are “yes,” what actions are required?  Are they required to bring legal action against the government sponsors to collect the required contributions, or is simply sending a demand letter sufficient to satisfy the obligation?  The ultimate answer largely may be determined by state law and whether the obligation to pay the annual required contribution derives from the state constitution, statute or a matter of contract law between the government sponsor and the pension fund. 

To date, this issue has not been addressed by a court, but it may only be a matter of time.  The issue has been addressed, however, with respect to ERISA-governed plans.  The ERISA cases suggest that public plan trustees have reason to be concerned.  The ERISA cases hold that trustees of ERISA-governed plans have a fiduciary duty to attempt to collect contributions owed to the plan.  What is significant about the holdings in these cases is that the common law of trusts was applied as support.  In one ERISA case the Supreme Court stated that under the common law of trusts, it is expected that a trustee will “use reasonable diligence to discover the location of the trust property and to take control of it without necessary delay.”  The fact that a trustee’s duty to collect the contributions owed to the plans was not just mandated by ERISA, but also was imposed on trustees by the common law of trusts, should cause public pension trustees to sit up and take notice.  One thing remains certain, government sponsors of pension funds will continue to face unprecedented budget pressures for the next several years.  Now, more than ever, trustees must look ahead and protect themselves along with the plans they work so diligently to protect and administer. 

Depending on the laws governing plan funding, plan trustees who do not at least  consider their options when a government entity fails to pay its annual required contribution may face questions whether they breached their fiduciary duty.

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