Belknap v. Partners Healthcare and Recent Developments in ERISA’s Actuarial Equivalence Litigation

Some Significant Case Developments 2019 Through Early 2022 

As noted, plaintiffs filed a flurry of proposed “actuarial equivalence” class actions in late 2018 to early 2019.  Most of these cases have survived motions to dismiss, though some have floundered on class requirements since plaintiffs’ proposed remedies often hurt the members of the class they purported to represent, e.g., participants who retire after the normal retirement age benefit from a plan’s use of older mortality tables with lower life expectancies, while changes in the interest rate can affect different groups in different ways, e.g., using more modern lower interest rates would typically decrease the value of joint and survivor annuities.  Some claims have also settled.  For example, Cruz v. Raytheon Company is settling for a total payment of $59 million, out of which plaintiffs’ counsel seek fees of $8.5 million.  Herndon v. Huntington Ingalls is settling for $2.8 million, with counsel seeking fees up to $700,000.   Plaintiffs claim this represents about 34% of their estimated damages

Urlaub v. CITGO Petroleum Co. is a recent example (February 2022) of a case surviving a motion to dismiss these claims.  In CITGO the plan was amended to update the interest and mortality assumptions, but plaintiffs that retired earlier with a joint and survivor annuity under the pre-amendment assumptions (consisting of an 8% interest rate and a 1971 mortality table projected to 1975) sued, claiming the mortality table was outdated and led to reduced benefits.  In one part of the opinion, the district court concluded that the actuarially equivalent value of a joint and survivor annuity commencing early includes any early retirement subsidy in a single life annuity that would likewise commence early, even though ERISA § 205’s requirement to provide a joint and survivor annuity is based on the “accrued benefit,” which is the (unsubsidized) benefit due at normal retirement age.

The CITGO court then addressed the “actuarial equivalent” requirement in ERISA § 204(c)(3) applicable to determine the amount of annuity benefits due in forms or timing other than the SLA.  The court assumed that there had to be a non-statutory “reasonableness” limitation imposed on this actuarial equivalent requirement because, it believed, otherwise an employer could game these benefits by using, e.g., mortality tables from the sixteenth century.   The court also reasoned a dictionary definition supported this view, since “equivalent” in Merriam Webster was defined to include “equal in force, amount or value.”

Belknap v. Partners Healthcare Rejection of Plaintiffs’ Continuing Reasonableness Claim  

Since cases have made it past motions to dismiss, attention should now be paid to how these claims fare on the merits at summary judgment.  Belknap v. Partners Healthcare is a recent case (March 2022) that ruled on the core “actuarial equivalence” issue on summary judgment after expert discovery.   In Belknap plaintiff asserted that defendant violated ERISA by using allegedly unreasonable, outdated actuarial assumptions to determine the value of his joint and survivor annuity that he commenced early at age 62, allegedly resulting in a lower monthly payment.  The pension plan has been in place for more than 50 years and used a 1951 adjusted mortality table and a 7.5% interest rate to calculate the value of the alternative annuities, like plaintiff’s age-62 joint and survivor annuity.

After two rounds of dispositive motions and amendments to the complaint, and consistent with a suggestion of the court, the parties engaged in a period of expert discovery followed by defendant moving to dismiss plaintiff’s claims.  Because both parties submitted expert evidence regarding the meaning of “actuarial equivalence,” the district court converted defendant’s motion to dismiss into one for summary judgment.  

The district court summarized the central issue concerning “actuarial equivalence” as one of statutory interpretation to determine whether ERISA imposes a reasonableness requirement for “actuarial equivalence” in this context.  The court concluded ERISA does not.  First, in analyzing the meaning of “actuarially equivalent” under ERISA § 204(c)(3), the court noted that the statute does not, on its face, define “actuarial equivalence” or require “reasonable” actuarial assumptions.  The court concluded this omission was significant since ERISA is a comprehensive and reticulated statute, and elsewhere ERISA does do so, such as by providing mortality assumptions and interest rates to convert annuities to lump sum payments.

 Second, the court looked at relevant regulations and case law, and concluded that they did not require actuarial equivalence calculations to be based on reasonable assumptions.  The court noted that the regulations related to lump sum benefits or to amendments of plans, neither of which applied here.  As to the cases, the court noted that many of the ones relied on by plaintiff related to lump sum benefits, which have specific rules for determining actuarial equivalence, or addressed other provisions of ERISA, such as its requirements for normal retirement age. As to the recent cases, such as CITGO, that read into the statutory text a continuing reasonableness limitation, the Partners Healthcare court found their reasoning unpersuasive, including that they had relied on rules and cases applicable to the calculation of a lump sum benefit or to tax qualification requirements under the tax code.

Third, to determine whether “actuarial equivalence” was a term of art in the field, it analyzed how actuaries treat it in practice when they calculate the benefits to be paid.  The court found the undisputed industry practice is to refer to the plan document to determine the actuarial assumptions to use.  Indeed, plaintiff’s own experts conceded this, though they noted the reasonableness of these assumptions will be considered when selecting the rates for a plan, i.e., when the plan is adopted, or these plan terms are amended.  In this case, defendant’s plan is the only relevant place where “actuarial equivalence” was defined, and the parties agreed that defendant followed the terms of the plan.   

Finally, the court concluded this was not an absurd construction of ERISA.  The court had noted earlier that there may be limitations on the actuarial factors a plan can use when it is adopted or amended.  But as to whether there is a continuing duty to update these assumptions, as the court explained, ERISA elsewhere does not require plans to reflect various forms of economic or social change, e.g., nothing in ERISA imposes cost-of-living adjustments, even though over time inflation can significantly erode the value of pension benefits.  The court also noted the practical problems of plaintiff’s proposed “continuing update” duty, e.g., what happens when mortality decreases, such as because of the recent COVID-19 pandemic?  Or when interest rates increase because of inflation, something that may be starting to happen now?  And how often would changes be needed, and how would any retroactive adjustments have to be handled? The court also noted that any changes to these actuarial factors affect retirees in very different ways, e.g., changing to a more modern mortality table (as plaintiffs claim ERISA demands) would harm those who took late retirement. 

Conclusion 

Absent congressional or perhaps regulatory action, the issues here will likely be litigated for several more years. Belknap offers a principled means to resolve these cases by explaining why ERISA should not be read to impose a duty to continually update these assumptions, while Belknap (and some of the class rulings) further illustrate how such a duty could harm plans and at least some (and perhaps many) of the participants it is supposed to protect.