Overview and Background
Beginning in late 2018, plaintiffs filed over a dozen proposed ERISA class actions challenging the actuarial factors (typically the mortality tables) used to calculate certain alternative forms of benefits for plan participants and beneficiaries. ERISA mandates that pension plans (i.e., defined benefit plans) offer a single life annuity (the “SLA”) commencing at normal retirement age. Pension plans also provide alternative forms of benefits including, qualified joint and survivor annuities (“QJSA”) that a plan is required to provide for married participants (unless the spouse consents to opt out) and different forms of optional annuities, such as term certain annuities (an annuity that pays a guaranteed stream of income for a set term). Often times, these plans also offer early retirement benefits, that is an annuity that commences before normal retirement age. Pension plans also pay annuities that commence after normal retirement age.
Actuarial factors based on mortality tables and interest rates are used to convert the SLA to these alternative forms of benefits. ERISA and the tax code specify the mortality assumptions and interest rates used to convert annuities to lump sums. However, ERISA generally provides that these other alternative annuities must be “actuarially equivalent” to the SLA, without providing any required mortality table or interest rates to make these conversions. ERISA also has various other provisions that could be implicated in such conversions, such as the protection of vested benefits generally from forfeiture, and from any cutback by plan amendment.
Many larger pension plans were first adopted or revised to comply with ERISA in the 1970’s and 1980’s, and they typically adopted mortality tables and interest rates commonly used at that time, which is also when the IRS clarified that pension plans must include these actuarial assumptions in the plans’ terms. Since then, life expectancy generally has increased (other than for recent setbacks because of COVID-19). Interest rates have (and continue) to fluctuate, though overall they have trended down since the 1980s. Older mortality tables that project higher mortality can often (but not always) cause the alternative form to be worth less than if a more modern table were used, but the higher older interest rates can often (but not always) cause the alternative form to be worth more than if a current lower rate were applied. Pension plans themselves have long life cycles both internally and as to participants – to illustrate, a pension plan could have been adopted or amended to add these actuarial equivalence factors in 1980, while a participant could have accrued her benefit between 1990 and 2015, not commence her benefit until 2020, and continue to be paid on that benefit until her death in 2040.
Plaintiffs claim that a pension plan’s continued use of the older mortality tables (with their lower life expectancy) put in place when the plans or these plan terms were adopted causes the QJSA and early retirement benefits to be less than the “actuarial equivalence” of the SLA. As part of this claim, plaintiffs argue that there must be a continuing reasonableness limitation imposed on each aspect of “actuarial equivalence” otherwise, they contend, the converted alternative benefit could become devalued as economic and social circumstances change.