On Monday, August 8, 2011, United States Bankruptcy Court Judge Mary Walrath ruled that Harry & David Holdings Inc. the Oregon-based gourmet food and gift company, can terminate its pension plan as part of a pre-arranged bankruptcy plan and emerge from bankruptcy free of its accumulated pension liability. The company convinced the court that it had to terminate the plan in order to successfully emerge from bankruptcy. The court permitted the termination despite the objections of the Pension Benefit Guaranty Corporation (the”PBGC”), which argued that the company could afford to keep the plan and that the termination really was being undertaken to appease the company’s investors. The PBGC is reviewing the court’s decision and will have to decide whether or not to file an appeal.

The bankruptcy court’s decision essentially transfers to the PBGC approximately $45 million in pension liabilities. Media reports suggest that the plan, which covers approximately 2,700 participants, was underfunded by about $23.6 million. It is expected that most participants, particularly lower and middle level income persons, will receive their expected pension benefits. However, some higher income level participants probably will receive lower pension benefits than otherwise promised under the plan.

This case underscores both the opportunity and the resultant costs imposed on the country’s pension system with respect to pursuing a distress termination of a pension plan. The PBGC currently is projecting a budget deficit, so this termination will add to that deficit total. To the extent that more underfunded plans are terminated (note that under current law underfunded defined benefit pension plans only can be terminated in the event of a qualifying distress terminations related to bankruptcy or insolvency), there might be a greater probability of increases in premiums that remaining pension plans must pay to the PBGC. Of course, that risk is exacerbated by the growth in and the sheer level of the deficit faced by the PBGC. There currently is controversy about how the PBGC calculates its deficit. Some PBGC observers (especially cynical ones) think the PBGC is in effect trying to inflate its deficit so it can win legislation that would increase premium rates or better yet allow the agency to unilaterally set premium rates (including variable rates). In fact, the Simpson-Bowles deficit commission (not that anyone seems to care about that commission) favored giving the PBGC unilateral rights to set premiums. The Obama administration supports that idea as well. There is an argument to be made that employers that dump underfunded plans on the PBGC might be paving the way for future increases in premiums imposed on remaining plans – either through unilateral action by the PBGC or through legislation. Therefore, it seems that prudent sponsors of defined benefit pension plans should monitor developments in this area so that they can better judge the merits and costs of continued plan sponsorship.