Compliance January 12, 2015

Court Lays Out Rules for Partial Plan Termination

Staff reductions over several years must be related to be considered together when deciding if a partial pension plan termination occurred.
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A federal appellate court has ruled that a series of reductions in the number of participants in the Household International Tax Reduction Investment Plan were not related and cannot be combined to determine if a partial plan termination occurred.

Ruling in the fifth appeal in a 19-year-long case, the 7th U.S. Circuit Court of Appeals reiterated its previous definition of “partial termination.” The court noted that there was no usable statutory or regulatory definition of partial termination when the case began, so it adopted its own in a 2004 opinion in the current case.

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The court determined that a 20% or greater reduction in plan participants is a partial termination and a smaller reduction is not. However, the court assumed a band from 10% to 40%, whereby a reduction of less than 10% of participants would be conclusively presumed not to be a partial termination, and a reduction greater than 40% of participants would be conclusively presumed to be a partial termination.

According to the appellate court’s latest opinion, the Internal Revenue Service (IRS) adopted its suggested 20% presumption in Revenue Ruling 2007-43.

In general, the court said, the period over which reductions in force may be aggregated to determine whether a partial plan termination has occurred is one plan year. However, in a decision in the current case handed down in 2000, the court conceded that corporate reorganizations or other significant events may not occur over the course of one plan year, so participant terminations in multiple years can be aggregated for consideration of a partial plan termination, but the multiple year terminations must be proven to be related.

Household International, Inc. (now known as HSBC Finance Corporation) began selling off a number of its subsidiaries in 1993. The lead plaintiff in the case, Robert J. Matz, claimed that in 1993, Household adopted a restructuring plan that included elimination of some subsidiaries and layoffs of other workers in 1994, 1995 and 1996. Taken alone, these reductions did not meet the 20% requirement for a partial plan termination, so participants were not 100% vested in company match accounts immediately.

The appellate court accepted a district judge’s decision that there was no restructuring plan—“that the decisions to sell particular subsidiaries had been made sequentially, on the basis of economic conditions in the particular market in which each subsidiary operated, and that these conditions had varied from market to market.” The court also pointed out that even if the reductions were taken together, the percentage of participants terminated would total 17%, below the 20% threshold.

The 7th Circuit determined the suit has no merit and affirmed the district court’s dismissal of the case.

The decision in Matz v. Household International Tax Reduction Investment Plan is here.

Deals & People January 12, 2015

Standish Enhances LDI Solutions Team

Standish Mellon Asset Management Company, a BNY Mellon investment boutique focused on fixed income, hired Max Guimond as solutions strategist for its liability-driven investing group.
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Standish Mellon Asset Management Company, a BNY Mellon investment boutique offering investment management services across fixed-income asset classes, named Max Guimond to the newly created position of liability-driven investing (LDI) solutions strategist. 

Guimond is tasked with managing overlays, augmenting Standish’s cash bond capabilities. He will oversee the implementation of completion strategies that utilize cash and derivatives to hedge the inherent risks in defined benefit pension plans.

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“As plan sponsors continue their efforts to minimize the effects of market volatility on the funded status of their plans, they increasingly rely on hedging managers specializing in LDI solutions that go beyond traditional fixed-income investments,” says Andrew Catalan, managing director and senior portfolio manager at Standish. “With Max joining our team, Standish increases the flexibility it can bring to managing risk across a wide array of asset classes.” 

Standish manages approximately $15.4 billion in LDI strategies, which have become an increasingly important tool for defined benefit pension plans seeking to reduce funded status volatility. Guimond, based in Standish’s Boston headquarters, notes that successfully implementing LDI strategies requires consideration of the total plan portfolio, including return-seeking assets such as equities. He is joining the company having previously served at Legal & General Investment Management America as a solutions strategist, structuring LDI solutions and managing LDI portfolios. He holds a bachelor’s degree from Dartmouth College.

More information can be found at www.bnymellon.com.

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