The New York County Supreme Court has dismissed a case that challenged the decision by the New York City Employees’ Retirement System (“NYCERS”), Teachers’ Retirement System (“TRS”) and Board of Education Retirement System (“BERS”) to divest billions of dollars of investments in companies involved in the extraction of fossil fuels (Wong v. NYCERS, TRS and BERS, NY Supreme Court, Index No. 652297/2023, 7//2/2024).
As predicted in a prior post and discussed here, the N.Y. court decided dismissal is appropriate because the plaintiffs participate in defined benefit plans that entitle them to fixed benefits each month and therefore face no injury and lack standing to challenge investment decisions that have no impact on the guaranteed retirement benefits they will receive.
Background
Four participants in three New York City pension funds brought an action against NYCERS (a $77.5 billion defined benefit plan); TRS ($64 billion) and BERS ($5.9 billion) for violating their fiduciary duty to administer the plans solely in the interests of the Plans' participants and beneficiaries by divesting the Plans of approximately four billion dollars of publicly traded fossil fuel investments. According to the participants, energy company investments divested by the Plans delivered exceptional returns outperforming the S&P 500 index by an order of magnitude of 58%.
Lack of Standing
In concluding that the plaintiffs lacked standing, the NY court emphasized that it agreed with the pension funds’ reliance on Thole v. U.S. Bank N.A. (590 US 538 [2020]) where the U.S. Supreme Court held that participants in an ERISA defined benefit plan that receive a fixed payment each month cannot sue for a fiduciary breach since their own benefits are not affected by bad investment decisions. In particular, the NY court pointed out that Thole requires that to establish standing a plaintiff must demonstrate that he or she suffered an injury in fact that is concrete, particularized, and actual or imminent. Plaintiffs do not have a concrete stake in the lawsuit when winning or losing does not affect their benefits.
The NY court also rejected plaintiffs’ argument that Thole is distinguishable because it involves the application of federal standing principles to a federal statute. The court agreed that they are not bound to adhere to federal standing requirements but emphasized that under New York law plaintiffs must nevertheless demonstrate that they suffered an injury in fact. (Matter of Mental Hygiene Legal Serv.v Daniels, 33 NY3d 44, 50 [2019].) This requires a showing that the party has an actual legal stake in the matter being adjudicated and has suffered a cognizable harm that is sufficiently concrete and particularized to warrant judicial intervention.
Takeaways
This was a procedural decision based on lack of standing and did not review the investment decision. The complaint contained fiduciary arguments which I consider persuasive and was very well drafted. However, its fatal flaw is a lack of standing because the plans’ divestment decision had no impact at all on plaintiffs’ retirement benefits. This is the case with most defined benefit pension plans where benefits are fixed and are not impacted by allegedly imprudent investment decisions.
If the three NYC pension funds were 401(k) individual account defined contribution plans where participants bear the brunt of investment risk there could very well have been a different result if funds with these investments were eliminated from the menu.
This decision has an impact on other politically motivated lawsuits by plaintiffs who are not directly affected by the rules they are challenging and also on future actions taken by those managing pension plans.
A recent example is the action of the NYC Comptroller immediately after the dismissal discussed here urging major pharmaceutical retailers to start filling prescriptions for the mifepristone abortion pill or else risk divestment of $1.3 billion of shares in those retailers by the NYC pension funds. Although it would be a fiduciary breach if that’s the only reason for divesting, participants would be unable to assert a claim since their own benefits are not affected by the investment decision.