Almost 20 years ago, amidst an operational compliance review of a Fortune 25 company’s defined benefit pension plans, the CFO called me early in the morning alerting me to a front-page New Yorkarticle on the “gaming” of pension plan actuarial assumptions and asked us to expand our review to make sure the selection of actuarial assumptions for his plan was conducted in a prudent objective manner.
The article detailed the collapse of pension plans as the result of the selection of improper actuarial assumptions that saved companies millions of dollars in pension contributions. According to the article, companies have been caught gaming pension assumptions since ERISA requires “reasonable” assumptions and “actuarial equivalence” and those terms are not defined and can mean different things to different people.
Fast forward to 2020 and nothing has changed.
For over a year there have been challenges to the use of pension plan mortality assumptions and, in particular, claims alleging that the use of older mortality tables in connection with the calculation of joint and survivor benefits violate ERISA’s anti-cutback rule. To date, eleven cases have been filed and all of the defendants have moved to dismiss the claims on various grounds. One case was. Two other courts denied motions to dismiss and concluded that discovery was necessary before ruling on the merits of the .
Another court granted a motion to dismiss for all counts to the extent they are based on ERISA’s anti-forfeiture provision but denied for those that are based on violations of ERISA’s early retirement and joint and survivor provisions, which depend on the meaning of the term “actuarial equivalent” and the definition of that term is “far from" There are other motions to dismiss pending throughout several district courts.
Whether actuarial equivalence assumptions for converting a single life annuity to a joint and survivor annuity are unreasonable, result in lower benefits and therefore violate ERISA generally is a question of fact that may not survive a motion to dismiss and like excessive fee cases companies may be inclined to settle rather than incur hefty legal fees. The best line of defense is the implementation of an independent robust prudent process to ascertain the reasonableness of actuarial assumptions.
Reasonableness of Actuarial Factors for Calculating Joint and Survivor Annuities
Retirees brought an action in a New York federal district court claiming that their former employer’s pension plan did not use reasonable mortality or interest rates in determining “actuarial equivalence” for a joint and survivor annuity.
The court granted the employer’s motion to dismiss, emphasizing that (i) ERISA does not require “reasonable” actuarial factors for calculating joint and survivor annuities and (ii) the reference in ERISA's anti-forfeiture provision to accrued benefits only protects participants when they reach normal retirement age and, in this instance, the participants bringing the action chose to retire.
Early Retirement Pensions Not “Actuarially Equivalent”
A Minnesota district court has ruled that retirees can move forward with claims that their early retirement pensions were not “actuarially equivalent” because they were calculated using out-of-date interest rates and life expectancy data, which caused their benefits to be.
In so ruling, the court rejected the employer’s argument that the retirees are trying to impose a “reasonableness” requirement into ERISA’s pension calculation rules. The retirees are not seeking reasonableness, said the court, but actuarial equivalence, which is required by ERISA.
Another Motion to Dismiss Denied
A Texas district court also denied an employer’s motion to. According to the court, the retirees adequately claimed that the employer's use of a 1984 mortality table and 5% interest rate assumption resulted in benefits that are not the "actuarial equivalent" of what they would have received had they taken the single life annuity, as required by ERISA.
In so holding, the court said it was not convinced by the employer’s argument that its use of the 1984 mortality table was reasonable, according to IRS regulations, because the regulations relate to whether benefits are discriminatory under Internal Revenue Code rulings and do not concern the actuarial equivalence requirements at issue.
Also, the retirees argued that the employer uses updated mortality assumptions when calculating the amount the employer must contribute to fund the plans while using 1984 mortality data when determining the amount of those benefits.
Mixed Order on Motion to Dismiss
A Massachusetts district court granted an employer’s motion to dismiss a lawsuit by retirees alleging the use of outdated actuarial information for the calculation of early retirement joint and survivor benefit payments to the extent the counts are based on a violation of the ERISA § 203(a) anti- forfeiture provision, which applies only to normal retirement benefits.
On the other hand, the court denied the motion to dismiss counts relating to alleged violations of ERISA §§204(c)(3) or 205, which require that early retirement benefits be the “actuarial equivalent” of a benefit commencing at normal retirement age.
The court also emphasized that, according to the complaint, the employer used “typical and up-to-date actuarial assumptions” when calculating the value of all benefit forms for its financial statements while using the old 1950s-era inputs (an inflated interest rate of 7.5% and a 1951 Group Annuity Mortality Table) to calculate actuarial equivalence for joint and survivor benefits, which is a clear violation of the actuarial equivalence standard.