Highlights
- In the past year, approximately 10 large employers and fiduciaries of their pension plans have been sued over the actuarial assumptions used by their pension plans. The lawsuits generally allege that the plans violate the Employment Retirement Income Security Act of 1974 (ERISA) by calculating certain pension benefits using mortality tables dating from 1951 to 1984.
- In the suits, the plaintiffs allege that the use of these tables is unreasonable, violates ERISA's requirement that benefit alternatives to single-life annuities be actuarially equivalent and leads to impermissibly diminished retirement benefits.
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Two recent
U.S. District Court decisions - both of which assumed that the actuarial factors used to calculate actuarial equivalence be considered "reasonable" - highlight the conflicts that pension plans face regarding ERISA's requirement of actuarial equivalence. Uncertainty remains about how the plans facing these lawsuits, and thousands of other defined benefits pension plans, should move forward in light of these recent challenges to established practices and differing interpretations of actuarial equivalence.
In an opinion issued in Smith v.
Similarly, in a written order issued in Herndon v.
Background
In the past year, approximately 10 large employers and fiduciaries of their pension plans have been sued over the actuarial assumptions (which include mortality tables and interest rate assumptions) used by their pension plans. The lawsuits generally allege that the employers and the plans violate ERISA by calculating certain pension benefits using mortality tables dating from 1951 to 1984 and that were generally required by plan terms. In the suits, the plaintiffs allege that the use of these tables is unreasonable, violates ERISA's requirement that benefit alternatives to single-life annuities be the actuarial equivalent to the single life annuity, and lead to impermissibly diminished retirement benefits.
ERISA requires that a pension paid in a form other than a single life annuity be "the actuarial equivalent of" a single life annuity. See 29 U.S.C. §§ 1054(c)(3); 1055(d)(1)(B) and (2)(A)(ii). The general notion is that benefits are actuarially equivalent when they are paid in ways that make them equally valuable to each other after factoring in the time value of money and the annuitant's life expectancy. ERISA, however, does not define "actuarial equivalent."
The Courts' Decisions
In Smith v.
The defendants moved to dismiss the case, arguing that a) ERISA requires plan sponsors to put actuarial assumptions in the plan document — but not to change them — and requiring changes would put ERISA and provisions of the Internal Revenue Code in conflict, and b) the mortality tables used by the plan are reasonable as a matter of law.
In denying the defendants' motion to dismiss, the court found that, under ERISA, "plans must ensure that any optional annuity forms are actuarially equivalent to a single life annuity," which "means that plans must use the kind of actuarial assumptions that a reasonable actuary would use at the time of the benefit determination." The court rejected defendants' argument that a plan complies with ERISA so long as it calculates the actuarial equivalent benefit using actuarial assumptions that were reasonable at the time they were written into the plan.
The court, in rejecting the defendants' arguments, a) held that requiring a plan to periodically adjust the mortality tables would not lead to plans manipulating actuarial assumptions in violation of the Internal Revenue Code's antidiscrimination mandate, b) recognized that amending a plan's actuarial assumptions could result in some conflict with the anti-cutback rules; and c) concluded that a potential conflict did not support defendants' interpretation of "actuarial equivalent." The court went on to disagree with the notion that plaintiff's interpretation of "actuarial equivalent" would require courts to legislate actuarial assumptions. Instead, the court reasoned that "ERISA already contains the relevant rule: plans must ensure the optional annuity forms are actuarially equivalent to a single life annuity."
Less than two weeks after the decision in
Key Takeaways
These recent decisions are the fifth and sixth of the cases in which the court has denied defendants' motions to dismiss. Both of the recent decisions discussed above assumed that the actuarial factors used to calculate actuarial equivalence be considered "reasonable." Interestingly, in a recent opinion denying a motion to dismiss in another of the pending cases challenging the use of certain mortality tables, the
One court has granted a motion to dismiss.
These recent decisions highlight the conflicts that pension plans face regarding actuarial equivalence. Uncertainty remains about how the plans facing these lawsuits, and thousands of other defined benefits pension plans, should move forward in light of these recent challenges to established practices and differing interpretations of ERISA's requirement of actuarial equivalence. The
In addition, the different approaches courts have taken in these cases, and some courts' rejection of other courts' reasoning or application of the law, creates additional confusion for plans and employers. The risk of inconsistencies in conclusions and rationales across jurisdictions, as well as the limitations a court faces (including the consideration of only the parties involved), suggest that a legislative response may be the most practical path forward.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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