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Ask the Expert: Five Things to Know About Single-Employer Defined Benefit Pensions in Bankruptcy
Suzanne Kelly, Kelly Garfinkle Strategic Restructuring LLC
Restructuring professionals often see issues and liabilities related to defined benefit pension plans pop up at inconvenient times, and in inconvenient amounts, during a bankruptcy. Given the complex set of laws regulating both the sponsorship and termination of pension plans, and the fact that the funded status of the plan, industry of the sponsor, and preferred outcome of the case (liquidation, sale or reorganization) make the issues that come up more complex than you might expect. There are a number of things to think about when you see a pension plan in a restructuring, but the five below should help set your expectations about what you might encounter.
1. The liability asserted by the Pension Benefit Guaranty Corporation (PBGC) when a single-employer plan terminates is usually much greater than any underfunding that has been previously reported for the plan.
2. The basic standard for terminating a single-employer plan in a bankruptcy reorganization is affordability. If you can afford the annual funding, PBGC will work hard to make sure the plan doesn’t terminate.
3. Terminating a plan and reorganizing doesn’t eliminate all of your pension liabilities. PBGC asserts a termination premium for three years of $1,250 per participant in a terminated plan. Case law to date supports PBGC’s position that this liability cannot be discharged in bankruptcy.
4. Controlled group members – inside and outside of a bankruptcy – have liability for plans sponsored by related entities, and they have to meet the same standards as the sponsor to terminate a plan.
5. Expect PBGC to fight to avoid pension termination even if you sell all assets in a § 363 sale.
Suzanne Kelly is the co-founder of Kelly Garfinkle Strategic Restructuring LLC, which specializes in advising plan sponsors, investors, creditors and unions on pension issues both inside bankruptcy and out. Prior to founding KGSR in 2013, Suzanne spent nearly 20 years at the PBGC, including the last 10 years working on pension issues in distress situations. She represented the PBGC on major bankruptcy creditors committees including: American Airlines, Delta Air Lines, Nortel Networks, Kaiser Aluminum, Lyondell Basell, Chemtura, St. Vincent Catholic Medical Centers in New York, and a variety of other cases. Suzanne can be reached at skelly@kgrestructuring.com.
Suzanne Kelly