Transcript

IN THE SUPREME COURT OF THE UNITED STATES

JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY, Petitioner v. HARRIS TRUST AND SAVINGS BANK, AS TRUSTEE OF THE SPERRY MASTER RETIREMENT TRUST NO. 2

No. 92-1074

October 12, 1993

The above-entitled matter came on for oral argument before the Supreme Court of the United States at 12:59 p.m.

APPEARANCES:

HOWARD G. KRISTOL, ESQ., New York, New York; on behalf of the Petitioner.

CHRISTOPHER WRIGHT, ESQ., Assistant to the Solicitor General, Department of Justice, Washington D.C.; as amicus curiae, supporting the Petitioner.

LAWRENCE KILL, ESQ., New York, New York; on behalf of the Respondent.

PROCEEDINGS

12:59 p.m.

CHIEF JUSTICE REHNQUIST: We'll hear argument now in No. 92-1074, John Hancock Mutual Life Insurance Company v. the Harris Trust and Savings Bank.

Mr. Kristol.

ORAL ARGUMENT OF HOWARD G. KRISTOL ON BEHALF OF THE PETITIONER

MR. KRISTOL: Mr. Chief Justice, and may it please the Court:

This case arises out of the purchase by a purchase -- the purchase by a pension plan of an insurance policy to provide guaranteed annuities to plan participants and beneficiaries. Under the provisions of the contract, the premiums paid are paid into John Hancock's general account and become part of Hancock's general corporate assets. The fundamental issue in this case is whether Hancock's general corporate assets are also to be considered assets of the plan.

Hancock unquestionably exercises authority and control over the management of its own corporate assets. If any of those assets are also deemed to be plan assets, then Hancock would be a fiduciary under ERISA and under ERISA's fiduciary rules would be required to manage its corporate assets, or at least a part of them, solely in the interest of the plan's participants and beneficiaries.

Congress specifically addressed contracts issued by insurance companies to pension plans in ERISA section 401(b)(2), and that section can be found at page A-94 of the Appendix to the Petition. It is referenced there as 29 U.S. Code section 1101(b)(2).

In substance, that section states that in the case of a guaranteed benefit policy issued to a plan, the contract itself is a plan asset, but the insurance company's assets are not plan assets.

The Second Circuit concluded in this case, the GAC 50, the contract in issue, is, in part at least, a guaranteed benefit policy within the meaning of section 401(b)(2), and that Hancock is not a fiduciary to the extent that guaranteed benefits have already been purchased by the trustee under the contract. That court went on to hold, however, that Hancock should be considered to be a fiduciary with respect to what the court referred to as the contract's free funds.

QUESTION: The contract's what?

MR. KRISTOL: Free funds, Your Honor.

QUESTION: Free funds.

MR. KRISTOL: Free funds.

Hancock and the Government take the position that Hancock is not a fiduciary at all with respect to its corporate assets because Harris Trust, as the plan trustee, has at all times had the right under GAC 50 to purchase additional guaranteed benefits to the full extent of the contract's so-called free funds. The contract in its entirety, therefore, is a guaranteed benefit policy under section 401(b)(2).

QUESTION: Or -- well, that's not quite accurate. Isn't -- what you could say with entire accuracy is to the extent the contract provides for benefits, it provides for guaranteed benefits.

MR. KRISTOL: No, I'm not sure I would agree with that formulation, Justice Scalia.

QUESTION: Well, what is in the free fund may not ultimately be used to provide benefits at all, right? It's up to --

MR. KRISTOL: That is correct. Well, I think that they would ultimately --

QUESTION: So, it is not -- it is clearly not providing guaranteed benefits. But on the other hand, if it's not providing guaranteed benefits it's providing no benefits at all.

MR. KRISTOL: No, I don't agree with that, Justice Scalia. I think that the contract itself, all of the funds held under the contract, whether they stay with John Hancock or are ultimately taken out of the contract by the plan trustee, would ultimately be used for benefits for participants and beneficiaries.

QUESTION: Guaranteed benefits?

MR. KRISTOL: Not necessarily, no. This contract not only provided that the plan could purchase additional guaranteed benefits to the full extent of the contract's free funds, but it also provided other possibilities as well at the option of the plan trustee. And among those options, of course, was the ability to use the so-called free funds to purchase or to provide so-called nonguaranteed benefits.

QUESTION: Let me ask you, if I may, a complementary question. Does John Hancock, in issuing policies to plans like this, ever issue anything that might be called an insurance contract that does not provide for some guaranteed benefit?

MR. KRISTOL: My view of it, Justice Souter, would be that if it's called an insurance contract, it would necessarily have guaranteed benefits of some sort.

QUESTION: At least within the meaning of the statute, yeah.

MR. KRISTOL: Within -- well, yes, within the meaning of the statute.

QUESTION: Yeah. If that is the case, then, then the exception the -- "to the extent" of language, whatever it means, will never have any operative effect, will it?

MR. KRISTOL: No -- no --

QUESTION: Because it will always be tagged onto -- I mean it will always refer to a contract to which the disputed amounts are tagged on to some level of guaranteed benefit.

MR. KRISTOL: No, I don't -- I don't think that's correct, Justice Souter. I can envisage a contract that would provide in its entirety, as this one does, for guaranteed benefits in the way that I've described it, that also could provide within the same contract that the plan trustee could use the free funds to pay nonguaranteed benefits. And I could visualize, though I don't believe any such contract has ever existed, that it would provide for variable benefits.

QUESTION: So that would at least distinguish it from the argument that you're making here. I see your point, yeah.

MR. KRISTOL: That is correct, Your Honor.

QUESTION: And how would the statute be construed in the instance that you put where with free funds the insurer may purchase guaranteed benefits or variable benefits? What result under the statute?

MR. KRISTOL: The result is --

QUESTION: Does the exemption apply?

MR. KRISTOL: The -- well, the result is the same. The only thing that Congress required in 401(b)(2) is that the contract --

QUESTION: Does the insurer have the benefit of the (2)(b) exemption in the case that I put?

MR. KRISTOL: The (2)(b) exemption, referring to 401(2)(b).

QUESTION: Yes.

MR. KRISTOL: I don't -- I don't know that I would characterize it as an exemption. But the answer is that the John Hancock would not be a fiduciary with respect to any of the assets held under the contract.

QUESTION: So as long as one of the options is to purchase guaranteed benefits, that gives the company the safe harbor that it seeks here.

MR. KRISTOL: If -- yes, if you want to use that term, that's correct. So long as the contract provides for guaranteed benefits either immediately or at some time in the future at the option of the plan trustee, then the contract in its entirety is a guaranteed benefit policy even though the contract might also provide options to the plan trustee to use the so-called free funds to provide nonguaranteed benefits.

And also in the example that Justice Souter asked me about, suppose there was a contract that also said the trustee could use these funds to provide variable annuities.

QUESTION: Well, then all an insurance company needs to do to get the safe harbor, if we can call it that, is to just include guaranteed benefits as one of the options and it's home free.

MR. KRISTOL: Well, the insurance company, of course, is entering into a contract with a fiduciary, the plan trustee. And the contract, if it provides for guaranteed benefits to the full extent of the book value of the contract, yes, that contract is a guaranteed benefit policy irrespective of the other options.

QUESTION: As a practical matter -- I think you may already have answered this for me, Mr. Kristol, but as a practical matter do you know of any instances in which your company, at least, has issued a policy in these circumstances without providing for some guaranteed benefit option for the use of the free funds?

MR. KRISTOL: To the extent that I'm familiar with insurance contracts, meaning contracts that provide for guaranteed benefits, the answer, of course, is they provide somewhere --

QUESTION: By definition, you're saying, yeah.

MR. KRISTOL: -- Somewhere. But I assume that there are contracts that are issued that don't provide for any guaranteed benefits.

QUESTION: But if we are going to -- if we're going to follow the definition of insurance contract as you're using it and as we all assume the statute is using it, then -- well, no, maybe I misunderstood your answer.

Is it necessarily the case that there could be an insurance contract -- I'm sorry, I'm saying this badly. Couldn't you have an insurance contract that simply made no provision for the purchase of any guaranteed benefit or additional guaranteed benefit with the free funds? That's -- that would be an insurance contract within the meaning of the statute, wouldn't it?

MR. KRISTOL: If the free funds portion was not available to use -- to be used for additional guaranteed benefits, which is the situation you're positing.

QUESTION: Yeah, yeah.

MR. KRISTOL: I would think that to that extent the contract -- to that extent -- the contract provides guaranteed benefits to the extent of the guaranteed benefits that have been purchased. Because, by definition, the balance of the funds under the contract are not available for that purpose. I should like to add, though, I don't think any such contract exists.

QUESTION: Okay.

QUESTION: What is the converse of a guaranteed benefit policy?

MR. KRISTOL: I think for all practical purposes, Mr. Chief Justice, it's a separate account contract, a variable annuity contract. That is, I believe that the definition which is a functional description of a general account contract deals with the -- one half of the universe of the contracts issued by insurance companies. They're either general account contracts and they provide guaranteed benefits, not necessarily in their entirety but typically, and the other hand variable annuity contracts.

QUESTION: Does that mean -- when you say a guaranteed benefit, that doesn't necessarily mean a fixed amount, does it?

MR. KRISTOL: It means, in the pension context, that the benefits payable to plan participants are fixed in amount by the plan.

QUESTION: Fixed at a dollar amount.

MR. KRISTOL: Fixed at a monthly dollar amount typically, that's correct. It --

QUESTION: And then the other half of the world is variable?

MR. KRISTOL: The other half of the world would be separate account contracts, some of which provide for variable annuities, and then there's a whole variety of other kinds of separate account products.

QUESTION: Mr. Kristol, there's reference in the briefs to the period between '77 and '82 and what is the nature of the benefits paid between those years? Were they, in fact, nonguaranteed, or were they fixed? What were they?

MR. KRISTOL: They were fixed but nonguaranteed, Your Honor.

QUESTION: No question in your mind about that.

MR. KRISTOL: That's correct. The plan provided, as I understand it, only for fixed benefits. And then under this contract, to the extent that the plan trustee purchased guaranteed benefits under the contract, then the monthly benefits to those retirees were guaranteed by the general account of John Hancock.

As to any other retirees, for example those that the plan trustee might decide that they wanted to pay the monthly benefit using money available to the plan, there was the -- this 1977 amendment which permitted the plan trustee to use funds held by John Hancock in this contract to pay those monthly benefits, but the benefits were never guaranteed by John Hancock. Of course, when they were paid they were paid.

QUESTION: But there's also comment to the effect that the decision below would wreak havoc. The Seventh Circuit adopted the Second Circuit's rule a decade ago. Is there anything that that case has wreaked havoc on the insurance industry in the Midwest?

MR. KRISTOL: No, Your Honor, it has not. And I think that's largely because that decision -- in that decision the Seventh Circuit itself quizzed -- questioned the correctness of the decision on the motion for reconsideration. It was decided on a motion to dismiss in the district court, and I think what the Seventh Circuit did was decide that a claim under ERISA had been stated, and I think they even doubted that by the time they ruled on the motion for reconsideration.

QUESTION: Do we have any followup to that Peoria case? It was -- the 12(3)(6) was overturned and when it went back to the district court, is there any followup?

MR. KRISTOL: Justice Ginsburg, I don't know what the followup is. There's no other reported decision and I, frankly, don't know what happened to the case.

QUESTION: Do I understand your position to be that this statute that Congress passed, that the meaning of it is essentially the same as if the Senate bill, which was very clear, had passed, that there's practically no difference?

MR. KRISTOL: I think, for all practical purposes, that's correct, it would not have any difference.

QUESTION: Mr. Kristol, could I followup on the various hypotheticals that you -- do I understand you to say that if there were guaranteed benefits and the free funds were to be used exclusively to provide contingent benefits -- that is benefits the amount of which or even the existence of which would depend upon whether the free funds were available or not, you would still call that a guaranteed benefit plan?

MR. KRISTOL: Justice Scalia, I'm not sure I quite understand the example, but I think I can say plainly what I mean in relation to the statute, that if the contract provides that the entire book value of the contract can be applied by the plan trustee to provide guaranteed benefits which would be fixed guaranteed benefits, the contract in its entirety is a guaranteed benefit policy within the meaning of this section of ERISA.

QUESTION: Now, take my hypothetical. There are guaranteed benefits which the insurer -- the insurer guarantees, fixed amount of benefits. In addition, however, if the plan generates more money, that is if the free funds are available for the purpose after paying off the guaranteed benefits, there will be additional benefits paid, but those benefits are contingent upon the free funds being available.

MR. KRISTOL: That isn't a construct I'm aware of. I'm having trouble, Your Honor --

QUESTION: Well, I know, I just made it up. I just want you to tell me whether you think that is a guaranteed benefit plan or not? As I understand your theory, it is. You're saying so long as some benefits are guaranteed, it doesn't matter what the rest of the money is being used for, even if they're being used for contingent benefits.

MR. KRISTOL: I hope I didn't leave that impression.

QUESTION: Well, that's how -- that's where you left me.

MR. KRISTOL: If the plan trustee has a right to provide additional guaranteed benefits, in our view the contract in its entirety is a guaranteed benefit.

QUESTION: That wasn't my hypothetical. Please take my hypothetical.

MR. KRISTOL: You made reference to a guaranteed plan. The plan in this case provided for fixed benefits.

QUESTION: That's right. The plan says --

MR. KRISTOL: In your --

QUESTION: -- There will be these benefits and they pay the insurance company and the insurance company says, yes, for this amount of money we will provide those fixed benefits. In addition, if there's -- you know, if our investments turn out to be very good and there's -- and there are sufficient funds in the free fund to cover it, we will pay additional benefits.

MR. KRISTOL: Yes, that -- that is a description of GAC 50. As the free funds under the contract grew, the plan trustee, of course, had more funds available to pay his nonguaranteed benefits. That doesn't change the analysis under the statute.

QUESTION: Well, I thought -- but doesn't -- it depends on the option being in the hands of the plan trustee and not the insurance company, doesn't it?

MR. KRISTOL: The option would always be in the hands of the trustee, if there's an option.

QUESTION: But if there were no -- if there were a case in which the only option for the use of the free funds, written right into the contract, was to provide variable annuities, then it would take it out of your -- the rule that you're urging us to adopt here?

MR. KRISTOL: No. That's a difficult question, but the answer is no. So long as the free funds can be used to purchase guaranteed benefits, then it is a guaranteed benefit in its entirety within the meaning of the statute.

QUESTION: No, I'm sorry, I just didn't state my point clearly enough. If the -- if the provision were that free funds may be used only for the purpose of purchasing variable annuities, then you would be outside the rule that you're urging us to adopt here?

MR. KRISTOL: That is correct.

QUESTION: Okay.

MR. KRISTOL: And if the contract in part provided for the use -- for that purpose and some portion of the free funds could not be used for guaranteed benefits under this contract, then to the extent that language would come into play.

QUESTION: Then different result.

QUESTION: I understand your brief to represent that for variable benefits under State insurance laws in all the States you can't use general account contracts?

MR. KRISTOL: That's correct, Your Honor.

QUESTION: So it's a hypothetical that State law prevents from being a reality.

MR. KRISTOL: Well, State law would require that if variable benefits were to be paid, variable annuity benefits, they would have to be paid out of a separate account.

QUESTION: Under your interpretation of the statute, how do you treat the phrase "to the extent?" Do you just ignore it?

MR. KRISTOL: No, Your Honor. In answering the question that I believe Justice Souter posed, to the extent that language refers to -- in using the case that's involved here -- the free funds, if all of the free funds can be used to purchase guaranteed benefits, then the contract in its entirety is a guaranteed benefit policy. If some of the assets can be used to purchase guaranteed benefits but not all of the assets, that's when the "to the extent," that language comes into play.

QUESTION: I will be candid to say I don't understand why you're not reading "to the extent that" simply to mean if. Because you're saying if it is a contingency in the contract that free funds may be used at the -- to -- in part, at least, to purchase further guaranteed benefits, that's the end of the inquiry. And it seems to me that's reading the phrase to mean if.

MR. KRISTOL: No, that's not correct. I'm not reading it as if because I didn't say, "if in part." All of the free funds have to be available to be used to purchase additional guaranteed benefits --

QUESTION: Oh, but all the funds may be available, but if the trust -- if the person exercising the option may use all of those available free funds but chooses to use only a portion of them, you would have us adopt the rule of construction, as I understand it, that you say governs this case.

MR. KRISTOL: That is correct, Your Honor.

QUESTION: Of course, if the free funds under the contract could just be returned to the plan, the plan trustee use it as he would, he could always buy a guaranteed contract, couldn't he, if you're in the insurance business?

MR. KRISTOL: If the -- that is correct, Justice. If he withdrew the funds --

QUESTION: So it wouldn't have to even mention the possibility of doing it, as long as the plan trustee had the power to buy insurance from you.

MR. KRISTOL: To buy additional guaranteed benefits to the full extent of the contract's --

QUESTION: And that option would always be there because you're in the insurance business.

MR. KRISTOL: If the plan took the money out of the contract?

QUESTION: Sure. And then said I'd just like to buy your policy. And you fix the price, as I understand it. He doesn't -- yeah.

MR. KRISTOL: Well, it's a negotiated price.

QUESTION: Would you explain one thing to me I have trouble understanding? What is the status of the PAF fund? That's not a segregated fund, is it?

MR. KRISTOL: No. The PAF isn't a fund at all. It doesn't -- it's not assets. Neither are free funds asset or funds. The PAF --

QUESTION: But they're separately accounted for on the company books, are they?

MR. KRISTOL: The PAF is merely a term that refers to the book value of the contract as reflected on the books of the company.

QUESTION: And that can be ascertained at any point in time, what the PAF is at a particular point in time.

MR. KRISTOL: That is correct, Your Honor.

May I reserve, Your Honor --

QUESTION: I think there's nothing to reserve. Thank you, Mr. Kristol.

MR. KRISTOL: Thank you.

QUESTION: Now, Mr. Wright, we'll hear from you.

ORAL ARGUMENT OF CHRISTOPHER J. WRIGHT ON BEHALF OF THE UNITED STATES AS AMICUS CURIAE SUPPORTING THE PETITIONER

MR. WRIGHT: Mr. Chief Justice, and may it please the Court:

Many questions have been raised. If I can respond first to Justice Ginsburg's question about whether our position would be any different if the Senate bill had been passed. I think it came out that our position would be different.

The Senate bill very clearly provided that general account assets are not plan assets. The conference committee rewrote the provision in its present form, and we believe that it made the following modest change. It provided that to the extent that a general account plan could be used to provide variable benefits, something that is -- that was and is highly unusual, that to that extent it would not be a guaranteed benefit policy.

QUESTION: Mr. Kristol said more than that. He said it can't exist as a matter of State law, that it's prohibited in all 50 States.

MR. WRIGHT: Well, there's one important exception which is illustrated in the 1978 advisory opinion that we've referenced, that's the College Retirement Equities Fund in New York. Since 1952 it has provided variable annuities out of a general account, and in 1978 it went to the Department of Labor for confirmation that it was not a fiduciary. Because the Department had earlier said, somewhat echoing the language of the Senate bill, that general account assets are not plan assets.

When the Department in 1978 was faced with the example of CREF, the College Retirement Equities fund, and realized that there was this exception under which variable annuities could be paid from general account contracts, it then recognized that, no, CREF was a fiduciary in that circumstance.

And if I could take 1 minute to explain why -- why that Labor thought that that was an important distinction and why Congress might well have thought that was an important distinction, I'd really like to explain that. If variable annuities are paid, then the amount that pensioners receive depends on how the general account is performing. It seems clear that Congress would want an insurance company to be a fiduciary in that circumstance. It's different with gen -- with group annuity contracts paying fixed benefits like those here.

The pensioners have been promised fixed benefits. In the case of those pensioners whose benefits have already been guaranteed, they will receive monthly payments for the rest of their lives from John Hancock, no matter how long they live and no matter how the general account performs.

QUESTION: Mr. Wright, you said -- as I heard you say it, you said that it does not constitute a guaranteed benefit policy if the free funds could be used to purchase variable annuities.

MR. WRIGHT: Well, let me phrase it another way.

QUESTION: Now, I don't think that's -- that is not what Mr. Kristol said, as I understood what he said.

MR. WRIGHT: Well, I think we're in agreement here, but our --

QUESTION: That's what I want to test.

MR. WRIGHT: -- Our agreements are greater here, certainly. Our position is that to the extent that the funds are available to provide fixed benefits, it's a guaranteed annuity policy.

QUESTION: Right.

MR. WRIGHT: To the extent that they're available to provide variable benefits, they're not. And if I could continue -- if I could --

QUESTION: Well, wait -- suppose --

QUESTION: What if either option is available?

QUESTION: That's right. Suppose the plan can take the money out of the -- out of the free funds and it's its option. It can use that money to buy fixed or contingent benefits, either one.

MR. WRIGHT: I think there are actually two very --

QUESTION: Under your test, that would not be a guaranteed benefit plan, but Mr. Kristol thinks it is a guaranteed benefit plan.

MR. WRIGHT: I think there are actually two different very good hypotheticals here, and let me explain that both of them are different than what's going on in this case.

Hypothetical one, the money, some of it is -- and let me say that both of these are hypotheticals. There is no State law that I know of that would allow either of these. Hypothetical one, the money is used to some extent to provide fixed benefits and to some extent to provide variable benefits. We would say that to the extent that fixed benefits are provided, it's a guaranteed annuity plan. To the extent variable benefits are provided, it's not.

QUESTION: Well, what's the -- what's the status before they decide what to do with the money? What's the status of the free funds?

MR. WRIGHT: Um, this is a separate hypothetical where --

QUESTION: That's right, but --

MR. WRIGHT: -- Where all the money is available to provide fixed benefits. But at the -- at someone's option, variable benefits could be paid instead. That is -- again, let me say that this is a hypothetical that hasn't occurred, and I think that it's a situation where the Department of Labor would be unhappy with the conclusion that it thinks flows from the language of the statute.

QUESTION: Well, but I take it the fund always has to exist before the option can be exercised. You have to characterize the status of the free fund the moment it's created.

MR. WRIGHT: Right. But in -- and --

QUESTION: Well, let me say that --

QUESTION: And what Justice Souter's asking, in effect, is we should have a test to know.

MR. WRIGHT: Well, in this case --

QUESTION: Simply based on the options available to the parties, what the status of this fund is.

MR. WRIGHT: Well, in this case it's easy. Variable benefits could never be paid. The free funds, while they were in the general account, were always available to provide fixed benefits. If the free funds were withdrawn, as some of them were, they still -- let me note at the outset that when they revert to Harris Trust they are, of course, plan assets, and the Harris Trust is a fiduciary with respect to them. And all Harris Trust can do with them is pay fixed benefits to Unisys employees. There is no variable option here.

QUESTION: I thought --

QUESTION: Well --

QUESTION: -- In this case, from the period '77 to '82, that some nonguaranteed benefits were paid.

MR. WRIGHT: That's right. But let me make clear those weren't variable benefits.

Here's what happens when because Unisys employees have been promised fixed amounts, if Hancock -- if Harris Trust can't get the money from Hancock, it has to go to its other investments or it has to go back to Unisys, but it has to pay those benefits. Now the so-called nonguaranteed benefits that were paid for a brief period were nothing more than fixed -- fixed monthly defined benefits paid to certain pensioners.

The only reason they're called nonguaranteed is because with respect to those pensioners Hancock did not promise to pay them for the rest of their lives no matter how the general account performed. Hancock merely wrote them monthly checks at Harris Trust's request.

QUESTION: Harris had to pick up the difference?

MR. WRIGHT: When John Hancock stopped paying them, Harris Trust had to start paying them. So the pensioners --

QUESTION: Well, the statute says nonguaranteed. It doesn't say nonvariable, it says nonguaranteed. It's enough that they're not guaranteed.

MR. WRIGHT: While the money was in Hancock's general account it was always available to provide guaranteed benefit at Harris Trust's option.

QUESTION: But they weren't, in fact, paying them during part of the period.

MR. WRIGHT: That's right. They weren't all used that way, but it always provided for them. And let me say, there's a difference between provided for and committed to. Congress didn't say that only money that's committed to the purchase of fixed benefits renders it a guaranteed benefit policy. It says provides for, and we believe that that means that a fund of money that's available to be used in the future to provide fixed benefits makes it a guaranteed benefit policy.

QUESTION: You're saying provides for benefits means something other than provides benefits.

MR. WRIGHT: Yes. And it means something different than committed to pay benefits as well.

QUESTION: So if guaranteed benefits may be made but need not be made, it has provided for them.

MR. WRIGHT: We think that's right.

QUESTION: And the whole fund is provided for so long as guaranteed payments may be made.

MR. WRIGHT: That's correct, Your Honor. And while we have some difficult hypotheticals, let me say that --

QUESTION: Why does that serve the purpose that you're concerned about, which is not to let the insurer play with the -- play with the assets of the pensioners?

MR. WRIGHT: Well, what the Secretary of Labor is concerned about would be if Hancock's management of the fund directly affected the amount insured -- I'm sorry, that pensioners received. That's what the Secretary believes that Congress was most concerned about. And since that's not a possibility here, this is a guaranteed benefit policy.

The hypothetical you've come up with, which doesn't exist, is one that would definitely trouble the Secretary of Labor, if there was a way variable benefits could get paid out of these policies. It hasn't arisen yet.

Let me say that it's Harris Trust's interpretation of what Congress did that's implausible here. They have the conference committee dramatically restructuring the way pension plans and insurance companies do business without hinting that that's what they're doing, without allowing a transition period.

It's the Secretary's view that adoption of the Second Circuit's approach would lead insurance companies to segregate pension plan assets into separate accounts. They'd have to move billions of dollars of assets into separate accounts. Congress allowed up to 10 years in transition periods for some other provisions of ERISA to take effect, yet here Harris Trust says Congress required all these billions of dollars of assets to be moved and didn't give them any time to do it. And --

QUESTION: If they were going to do that, they'd do it in a conference report, don't you think?

MR. WRIGHT: If they were going to say it?

QUESTION: If they were going to do something so unusual, they would do it in a conference committee, wouldn't they?

MR. WRIGHT: I don't think Congress meant to do it, Your Honor.

Thank you.

QUESTION: Thank you, Mr. Wright.

Mr. Kill, we'll hear from you.

ORAL ARGUMENT OF LAWRENCE KILL ON BEHALF OF THE RESPONDENT

MR. KILL: Mr. Chief Justice, and may it please the Court.

In the case of an insurance carrier, the statute tells us exactly what is covered and what is not covered. It is not necessary to go beyond the statute. The statute does not define plan assets except in the case of an insurance carrier. And in the case of an insurance carrier, the definition of plan assets is anything other than a guaranteed benefit policy.

We all agree that guaranteed benefits are exempt. Our position is that variable benefits or variable payments to a plan are plan assets and subject to ERISA's fiduciary duty rules. The language of the statute is an effort by Congress to make certain that the traditional or standard annuity -- where pension funds are given to a carrier in exchange for a promise to pay specified benefits at a specific time in the future. Congress was exempting the traditional standard annuity.

In Peoria, Jude Posner makes that analysis and I think it follows from a reading of the statute. Guaranteed benefits are exempt; everything else is within the four corners of the statute. The definition of fiduciary is functional, and you look at a person's activities.

The activities here by Hancock are specified in a contract which is labeled guaranteed benefits, nonguaranteed benefits. Two different distinct promises are made and were made in 1977. The payment of guaranteed benefits has nothing to do with this case. The payment of nonguarantees has everything to do with this case.

It was understood that Hand could -- Hancock would invest pension funds in order to -- in order to create money for the payment of nonguaranteed benefits, if sought by the plan. In this case the plan demanded that Hancock use the excess funds for the payment of nonguaranteed benefits and Hancock said no.

In 1982 they turned off the spigot and said we can't use it. Can we have it back? No. What can we do with it? Nothing. Until 1988 when the nonguaranteed portion had risen from $18 million to in excess of $55 million, the plan was frustrated in its ability to use those excess funds.

In 1988, Hancock finally agreed to a plan amendment which allowed us to withdraw almost $55 million of free funds -- a term coined by Hancock, not the trust. Under that amendment we could withdraw it without suffering the penalty of contract termination and the repurchase of annuities and, in effect, convert the contract into a deferred annuity contract.

Now, the question as to whether the $55 million, when in the possession of Hancock, was not free funds but the moment it was transferred it became free funds. Now, Hancock's position in this case is a resurrection of the Senate bill, plain, simple resurrection of the Senate bill.

The DOL recognizes that that does not make any sense and Congress must have something else in mind. And as a guess, and they say it's a guess, they sought to close a large loophole. That is the sale of variable annuities out of the general account.

QUESTION: They say they have the example of CREF having such a case.

MR. KILL: CREF is not even an insurance carrier. There's no evidence in the legislative history or otherwise that Congress was even aware of that particular problem.

QUESTION: They say that CREF came to them with a request for -- to -- a ruling.

MR. KILL: In 1978 after the enactment of ERISA. And they issued an advisory opinion which in -- which is very supportive of the position that we take before this Court. To the extent that the insurance carrier invests funds which create a variable return which can be used by the plan for nonguaranteed benefits, it is a plan asset and Hancock is subject to the fiduciary rules.

QUESTION: Mr. Kill --

MR. KILL: In addition, except for that one example at the birth of ERISA and today it's illegal in all 50 States to sell variable annuities out of general accounts. So that doesn't make any sense at all.

QUESTION: Mr. Kill, can I just clear up on factual. Now, you were referring to the period after 1977. What about the period between 1968 and 1977?

MR. KILL: The period between '68 and 1977, the only contractual arrangement was for the payment of nonguaranteed benefits -- excuse me, payment of guaranteed benefits. And --

QUESTION: Could the '67 -- after the '67.

MR. KILL: After '68, although the conversion from a deferred annuity into a -- what they call an IPG contract changed the relationship of the parties in that it became an investment contract and really not an insurance contract.

QUESTION: But isn't it after the '68, or '67 amendment effective '68, that you acquired the right to have free funds generated that would not be used for guaranteed benefits?

MR. KILL: Between '68 and '6 -- and '77, when an employee retired he was entitled automatically to guaranteed benefits. The purpose of the '77 amendment was twofold, to sort of freeze the population -- not require the fund to request any further guarantees at all. And since 1977 the fund has not requested any further guarantees.

QUESTION: Would you agree that during the period between '68 and '77 they were within the safe harbor completely?

MR. KILL: No, Your Honor, I would not agree. I think it's clear in light of the '77 amendment. The reason for the '77 amendment was the results --

QUESTION: I know. And I'm trying to find out what your position is about '68 to '77.

MR. KILL: The results during the period '68 to '77 was creating on an annual basis what Hancock call free funds and we call admitted excess. An amount over and above the amount they need, using the contract assumptions, to guarantee the benefits. These free funds were sitting there and were not available for any purpose. During '68 through '77 at times Hancock allowed a rollover or a roll out in 1977, for example, of some of the free funds to prevent the excess funds from increasing.

But the problem had reached the point of the continued growth of free funds that Hancock in 1977 agreed that the free funds now can be used to pay nonguaranteed benefits because the trustee was very unhappy, as a fiduciary, seeing pension funds in the possession of Hancock which cannot be used for benefit enhancements.

QUESTION: Well, let me ask the -- try to get the question a little different. When, in your view, did the insurance company incur an obligation to have separate -- separate segregate funds for your benefit?

MR. KILL: Well, one, I think -- and that gets to the -- sort of the havoc that was mentioned. We don't agree with that at all. What we have is a general account. We already have segmentation. We already have, and they've had since 1982, separate lines of business where they do segregate.

QUESTION: It seems to me you can answer my question with a date. I'm asking you when, in your view, they had an obligation to create separate segregated funds for your benefit?

MR. KILL: Well, I do not think they have an obligation to create segregated funds.

QUESTION: Ever.

MR. KILL: That's my difficulty. They have an obligate -- have a general account, we agree. General account stands for --

QUESTION: Do you think the fiduciary can commingle the funds that are held for your benefit with its general funds?

MR. KILL: Yes, as long as they segment. And segmentation is a tool that the insurance companies use for asset allocation. They actually -- they actually allocate assets to different segments. They have a pension segment, they have a life segment, they have a casualty segment. Each has different investment policies. It's still commingled, but they tag assets.

QUESTION: But do you think accounting in the PA fund was an adequate compliance with their --

MR. KILL: Excuse me, Your Honor?

QUESTION: Do you think the accounting that they did provide in the PA fund, or whatever they called it, was an adequate compliance with their fiduciary obligations to you?

MR. KILL: I think with seg -- not the mere accounting function. I think with segmentation where they allocate specific assets and so the standard of investment is consistent with ERISA's prudent man rule, then I think, yes, they would be in compliance with ERISA and their obligations to the trustee.

It is not the fact of the general account that creates any problem. The --

QUESTION: That's a lot more than mere allocation. I mean that is mere allocation and separate investment treatment, isn't it?

MR. KILL: It is because they have different lines of business.

QUESTION: And isn't -- isn't that really what Justice Stevens was getting at when he was speaking of the need to segregate funds?

MR. KILL: It's a form of segregation, it's a form of segmentation.

QUESTION: Well, but it's not enough. It's not enough. You say they have different lines of business. ERISA doesn't guarantee that you treat this line of business separately. It says that the fiduciary shall discharge the following duties with respect to a plan solely in the interest of the participants and beneficiaries.

That means that he would have -- the insurance company would have to identify funds that are solely in the interest not of this whole line of all insureds from all companies who have contingent benefits, but in -- your contingent beneficiaries they would have had to guarantee.

MR. KILL: And that is exactly what they do through segmentation.

QUESTION: Fund by fund or line of business by line of business?

MR. KILL: Contract by contract and line of business by line of business, assets are allocated. And the standards applied by Hancock with respect to the pension lines of business, which could be the ERISA lines of business, are consistent with the higher standards that ERISA demands to act solely in the interest of the plan.

QUESTION: Well what do you mean when you say assets are allocated?

MR. KILL: They're tagged, identified.

QUESTION: Well, I mean a particular -- say -- supposing the John Hancock owns a building somewhere. Does that mean that that particular building is allocated to some phase of its business?

MR. KILL: It may be, Your Honor.

QUESTION: And well -- it may be, but that wouldn't necessarily be.

MR. KILL: It would be -- it would be up to Hancock, as a fiduciary, to establish standards which comply with ERISA's prudent man rule. ERISA's does not require that you invest in A or B.

QUESTION: Well, no, I was asking you about existing practice, not what would happen. You -- your -- I thought you said right now assets are segmented.

MR. KILL: They're -- they are segmented, that is our understanding. It's in the undisputed facts in this case that Hancock, since at least 1982, has had a policy of segmentation.

QUESTION: Okay. Then I want to know what segmenting means.

MR. KILL: Segmenting means identifying particular assets.

QUESTION: Like a building.

MR. KILL: Like a building.

QUESTION: And doing what with it?

MR. KILL: And the income generated and expenses attributable to that asset are allocated to that line of business.

QUESTION: To your fund?

MR. KILL: To our fund.

QUESTION: Your particular fund.

MR. KILL: Eventually to our fund.

QUESTION: Not eventually. Immediately allocated to your fund.

MR. KILL: Not -- no, Your Honor.

QUESTION: They're not.

MR. KILL: No.

QUESTION: No, just to a casualty line of business or the life line of business or the pension line of business.

MR. KILL: First to the pension line of the business and then through Hancock's investment generation method, which looks at the year in which contributions were made, it eventually is allocated to the particular contract.

QUESTION: You mean a building will actually come to be allocated to some particular contract?

MR. KILL: A real estate investment of any magnitude may very well be permissible with respect to one line of business --

QUESTION: Well you say very well be permissible, but I want the facts. And if you don't know them, for heaven's sakes say so. I mean, I don't know. I'm trying to find out.

MR. KILL: My understanding is -- and I don't -- do not know the specific investments, is that Hancock has separate investment standards and policies. With respect to the pension line of business it will engage in certain investments which are consistent with the necessity to provide security because we are dealing with pension funds. But I cannot tell you the specific assets involved.

QUESTION: But different funds may have different needs. For example, the employees in your fund may all -- you say they haven't had annuants for a while. They may all be approaching the age -- well, you'll only need the money for another 10 years so it would pay to liquidate this piece of real estate if this were the only fund you're talking about.

Whereas if you have a general allocation of this real estate to simply contingent funds, not just your fund but a lot of other ones, it might pay to retain the real estate. Now as I read ERISA, that real estate has to be dealt with in the interest of your fund's beneficiaries, not funds in general but your fund's beneficiaries.

MR. KILL: Well, the Department of Labor, in interpreting ERISA, has authorized and approved pooled separate accounts, which is commingling the funds allocable to many many different plans. The Department of Labor has even authorized banks under -- banks to commingle pension funds and nonpension funds. They -- the fiduciary is still obligated to maintain the standards of ERISA. And the language of --

QUESTION: Without examining the funds at all. Just these are pension funds without examining whether the funds have exactly the same kind of beneficiaries and exactly the same kind of needs?

MR. KILL: Well, I think the -- the Department of Labor, through its regulatory process, oversees exactly what fiduciaries are doing. They must make annual reports. Pursuant to 5500, the Department of Labor requires annual reports which identify the investments that are made. It is a system under which the fiduciary has the obligation and the Department of Labor does not sit there day in, day out, and determine what investments are appropriate.

Now, if I may, the issue of the statute, because I think while there are certain problems that may result in the event that the Court decides that assets in the general account -- because they're used to create additional funds for the payment of nonguaranteed benefits or plan assets, I think we have to look at the statute.

The phrase "to the extent" is a phrase of limitation. The phrase "to the extent" is not only used in the statute regarding guaranteed benefit policies, but is used with respect to fiduciaries. You can be a fiduciary to the extent you provide certain activities and you can be a nonfiduciary with respect to other activities regarding the same assets. If it's used in the statute, it ought to be given the same meaning. To --

QUESTION: This language does not say "provides." It says "provides for."

MR. KILL: Provides for benefits. It doesn't say "provide for the purchase of benefits." It doesn't say "provide for the purchase in the future of benefits." The --

QUESTION: And it doesn't say "provides benefits."

MR. KILL: The argument "provide for," first of all, was not even raised in the Second Circuit by John Hancock. But --

QUESTION: Well, we're here to do our best to interpret the statute correctly.

MR. KILL: I understand. It was raised first in the Third Circuit by Mack Boring. Now, Mack Boring decided that variable annuities payable to a plan do not trigger ERISA's fiduciary responsibilities as long as any benefits -- and it substituted for the words "to the extent" the word "if." If any benefits are guaranteed, no matter how minuscule, the entirety of the contract is immune. It ignored the words "to the extent."

Well, the words "to the extent" are used not only in the statute, they're used in the conference report where the conference committee was describing the amount that it believed should be subject to the guaranteed benefit policy exception and the funds that should be subject to ERISA.

And the conference report does not speak just solely in terms of benefits. It speaks in terms of payments, payments to plans. Now, here we have a defined benefit plan, but the money to pay the defined benefits comes from investment managers such as John Hancock. That's what they were hired for, and they would provide the funds from which the benefits may be enhanced.

Let me answer the "provide for," because I think this Court, Justice Harlan, answered that question in SEC v. United Benefit, where we had a similar annuity option purchase facility. And Justice Harlan stated -- in trying to determine the investment and insurance components of a single contract, he said you look at the features. Even with that facility, until there's a purchase of annuities it remains an investment contract subject to the securities laws.

QUESTION: Well, now what bearing would that decision construing another statute have on this one?

MR. KILL: The "provide for" language is used by John Hancock and the Department of Labor to argue that as long as we have the option to buy. And what I'm saying is even if we had the option, it's still not a guaranteed benefit policy until we exercise the option. We shouldn't be a captive and be required to exercise the option.

Moreover, the amount available for benefits, these nonguaranteed benefits, as to which we can exercise the option in the future depends solely and entirely on the investment experience of this contract. The risk is solely borne by the policyholder.

QUESTION: Mr. Kill --

MR. KILL: Hancock does not have any risk.

QUESTION: I guess it would be -- would have been quite impossible for this text to have read "provides benefits" rather that "provides for benefits," because the contract never provides benefits. The policy never provides benefits. It would have to read "the policy or contract provides for benefits." I don't really see that the word "for" gets you a whole -- a whole distance along the line. The only logical way to say it is "provides for benefits."

MR. KILL: It -- "provides for benefits" means the standard annuity. You provide now, in the present tense, for benefits.

QUESTION: The contract never provides benefits, does it?

MR. KILL: The contract with the carrier provides for a guarantee of benefits.

QUESTION: Right. It does not provide benefits.

MR. KILL: It does not provide for benefits. It doesn't directly provide for benefits. Hancock is a guarantor. They said defined benefit plan and Hancock, in effect, guarantees the benefits. It does pay the benefits because the plan, under the contract, has the right to ask Hancock to pay the benefits. So Hancock does pay the benefits.

Now, the "provide for," if I may, it doesn't say provide for the purchase or provide in the future. And even if this is an -- even if this is an option available, there's no price. There's an illusory promise. What price?

Hancock can unilaterally set the price. This statute cannot mean that you would immunize the entirety of a contract which can't -- contains no guaranteed benefits and just an option, an annuity option, without more -- without price. The price can be unilaterally set by Hancock in the future at any time. So what we have here is the amount is uncertain and the price is uncertain.

And moreover, as a fiduciary, Hancock should not be in the position of compelling us to use nonguaranteed benefits to purchase nonguaranteed -- funds available for nonguaranteed benefits to purchase guaranteed --

QUESTION: Mr. Kill, the fact that the -- the fact the guaranteed points aren't settled doesn't seem to me to necessarily answer it. Supposing you had a -- the original version of the arrangement, they provided nothing but guaranteed policies pursuant -- and even if they could change the rates, and even if you could change the amount you purchased, it would still be within the safe harbor.

Suppose there was nothing contemplated other than guaranteed --

MR. KILL: Well, that's the original. That isn't part of it. Because the reason for the enactment of ERISA --

QUESTION: Yeah, but I'm saying in it's original form could not the price change and the amount you purchase change?

MR. KILL: In the original form there were prices set in the contract.

QUESTION: Forever?

MR. KILL: Not forever. Until 1973 it was the fixed price.

QUESTION: And who changed it in 1973? It's up to them, I assume.

MR. KILL: Hancock -- Hancock has the right after 1973.

QUESTION: And if the price goes too high, you'll just buy your insurance elsewhere.

MR. KILL: We can't because we can't use the free funds to buy insurance elsewhere.

QUESTION: No, no, no. Forget the free funds for a moment. I'm just assuming they had nothing but a guaranteed -- guaranteed contracts covered -- as they did originally. You could vary the amount. You didn't have an exclusive requirement that you buy all your insurance from them, did you?

MR. KILL: Absolutely not. We did not.

QUESTION: So the price -- both the price and the quantity covered by the contract were variable even though it was within the safe harbor.

MR. KILL: No what the -- the difference is in that in 1974 Congress decided to enact ERISA to assist trustees such as this one from the abuses of an insurance carrier maintaining funds for its own purposes far in excess of the amount necessary for those guaranteed benefits.

Now, prior to '77, there were excess funds and -- but when an employee retired, yes, the guarantees were automatically -- they -- automatically guaranteed. But the excess funds were growing.

QUESTION: Well, interest rates were going up. I assume insurance companies made money.

MR. KILL: And we couldn't use the excess funds.

QUESTION: You're not saying they're not entitled to make a profit?

MR. KILL: They are entitled. This is -- this is not Hancock's profit. We have a contract and it's allocated to a pension administration fund and they have a liability that matches the amount of assets they hold. The only difference is that we cannot use the amount that's in excess of the amount necessary, computed by Hancock, for nonguaranteed benefits.

We couldn't use it between '68 and '77, but because of ERISA -- and the terminology is the same. In the 1977 amendment it speaks of guaranteed benefits and it speaks of nonguaranteed benefits and it says -- it uses the phrase in the contract, "to the extent that Hancock guarantees benefits, it has responsibility. Otherwise, the risk is solely that of the policyholder."

And that is -- that is the essence of the -- our understanding of the cases that have considered ERISA. It's who bears the risk. Until there is a purchase, the risk is entirely, 100 percent, on the plan. If the amount of money is not sufficient to pay the nonguaranteed benefit when a person retires, Hancock doesn't bear the risk. We must make a contribution or the contract would be terminated. So the risk, until there is an acquisition of a guaranteed benefit, is entirely on the plan. Once Hancock assumes the risk, that is the money, that is the funds that are outside the purview of ERISA.

Now, the statute also uses the word "benefits" and there's been a lot of stress, but doesn't that mean that anything else -- can we ignore variable payments to the plan? This Court has held that the protection of the plan is equally important. Not only the protection of participants and beneficiaries, they are protected through the plan.

The conference committee uses the word "payments to a plan." Those are the funds, the money that becomes eventually the benefits that are paid to the participants and beneficiaries. If Hancock's interpretation is accepted, that if the benefit -- if they guarantee a single benefit in a contract, that the entirety of the contract is immune, that means every defined benefit plan in the United States funded in part by insurance companies is outside the protections of ERISA. And that, I submit, is a more unconscionable result than the parade of horribles that has been used and grossly exaggerated before this Court.

QUESTION: Mr. Kristol, I think, had to say that Congress really didn't do anything different from what was in the Senate bill. And if that's so, you lose.

MR. KILL: If that is so, we would lose because Mr. Kristol's interpretation is the enactment of a Senate bill immunizing general accounts as a category.

QUESTION: And that's what he says. They made some changes and the Department of Labor has told us that that change took care of a case which, in reality, is not likely to occur. But if what Congress did do -- we have a clear Senate position. Everyone agrees the Senate was clear, general account is out. And then Congress did something and no one is actually -- is entirely clear what Congress did.

And then we're left with the Department of Labor's at least current interpretation is clear, whatever wavering there may have been. Isn't the Court bound to respect the Department's construction?

MR. KILL: Well, you know, there are at least four reasons why this Court should not grant deference to the Department of Labor. One, it's fundamentally in conflict with the statute. The Department admits it does not have the power to grant an exemption from ERISA's fiduciary responsibility rules.

QUESTION: You're not claiming that the statute has a plain meaning, are you?

MR. KILL: Yes, Your -- yes, I am, Your Honor. I think the statute, on its face, has been twisted all out of context. All it -- all it says is a guaranteed benefit policy is a policy to the extent it provides for benefits, the amount of which is guaranteed.

QUESTION: You're saying that to the extent that plainly doesn't mean "if."

MR. KILL: Exactly, Your Honor. That is -- that is the exact point. If I could only add, because a question arose --

QUESTION: And so it would be you taking on both the panel of the Third Circuit that didn't agree that the statute had that plain meaning, and the Department of Labor.

MR. KILL: Well, the Third Circuit, I think, interpreted the phrase "to the extent" using the word "if" instead, and then said variable annuity -- perfectly candid -- are not protected by ERISA, and then stated that "provide for" means as long as you have some right at any time in the future, that's sufficient for the court to determine that this is a guaranteed benefit policy.

But if I may finish the answer, because 75-2, upon which the Department seeks deference through today, so-called settled expectations, is not factual.

First of all, they issued advisory opinions that are fundamentally in conflict with Interpretive Bulletin 75-2. They told the Second Circuit they did not have a position; that it was very important, very complex. They've even told the court that our interpretation of the statute has some merit and that it concededly has advantages.

QUESTION: Yeah, but their point was -- their point was that the statute is ambiguous.

MR. KILL: And they said that it concede -- that our interpretation has some merit. And all I'm suggesting, that that if that is the case and the statute is ambiguous, I would imagine that the trustee representing the pension plan should prevail because the purpose of ERISA --

QUESTION: But that's exactly when we defer to agencies, when a statute has more than one plausible meaning. I think, and Justice Stevens told us, that we are to defer to the Agency's position as long as is it is a plausible reason -- reading even if not the most plausible.

MR. KILL: Well, I think general deference is part of our jurisprudence. But you look at the thoroughness, the reasoning, the consistency, and the persuasiveness. In light of the history, I think that the DOL has not established any of these elements. They -- as late as last year telling the Second Circuit they did not have a position.

And what is the position today? The position today is fundamentally inconsistent with IB 75-2, upon which they rely. They said -- IB 75-2 was intended to give a blanket exemption, like the Senate bill, to insurance companies. Today they stand up and say no, this was intended to cover variable annuities sold out of general accounts, even though that's illegal in all 50 States. But those are two inconsistent positions. The DOL has not made a consistent position.

They have, in fact, supported the trustee on numerous occasions in advisory opinions and in other ways. And if you read their brief, except for the bottom line they're very supportive of Harris Trust. They point out that our position has merit, that it would protect pensioners, it would protect plans against -- it said added significant -- significant is their word -- legal protections to protect plans against losses. That is what ERISA is all about.

So the history of the Department's interpretation of this statute has been ambiguous. not the statute. And I dare say today their interpretation is fundamentally at odds with the meaning of the statute. It just doesn't make any sense.

CHIEF JUSTICE REHNQUIST: Thank you, Mr. Kill.

The case is submitted.

(Whereupon, at 1:59 p.m., the case in the above-entitled matter was submitted.)