a challenge to actuarial assumptions in defined...

A Challenge to Actuarial Assumptions in Defined Benefit Plans: Are Optional Forms of Benefits Actuarially Equivalent?Recent Case Law, Claims and Defenses, Fiduciary Obligations, Avoiding Administrative Pitfalls, Plan Modifications

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TUESDAY, SEPTEMBER 17, 2019

Presenting a live 90-minute webinar with interactive Q&A

Katherine B. Kohn, Of Counsel, Groom Law Group, Washington, D.C.

Brian J. Lamb, Partner, Thompson Hine, Cleveland

Joshua Shapiro, Senior Actuarial Advisor, Groom Law Group, Washington, D.C.

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A Challenge to Actuarial Assumptions in Defined Benefit Plans:

Are Optional Forms of Benefits Actuarially Equivalent?

Katherine Kohn, Esq.

Brian Lamb, Esq.

Josh Shapiro

6

Agenda

I. Overview of actuarial assumptions

II. Recent court cases

III.Plaintiffs’ claims

IV.Defenses

V. Court decisions

VI.Considerations for plan sponsors and administrators

7

Overview of actuarial assumptions

8


• Applications to plan administration

• Optional forms of benefit

• Early / late retirement

• Sources of uncertainty

• Lifespans are unknown

• Time value of money (i.e. discount rate)

9


• Case study: joint and survivor annuity

• Plan benefit expressed as a single life annuity

• Participant may elect a J&S annuity

• Portion of benefit will continue to surviving spouse

• Joint and survivor benefit

• On the average, benefit is paid for a longer period of time

• Lower payment amount needed for equivalence

• Reduction expressed as a J&S factor (e.g. 95%)

10


• J&S factor may vary based on:

• Age of participant at retirement

• Age of spouse at retirement

• Percentage of benefit payable to surviving spouse

• Other considerations

• Gender of participant and spouse

• Health status

• Simplified factors

11


• Actuarial assumptions

• Used where future events are unknown

• Mortality table

• Discount rate

• Other assumptions

• Concept of reasonableness

12


• Plan administration

• Maintain actuarial equivalence of benefits

• Assumptions specified in plan document

• Prescribed by IRS for lump sums

• Actuarial valuations

• Funding and accounting requirements

• Funding discount rate and mortality prescribed by IRS

• Other assumptions generally selected by actuary

13


• Mortality assumptions

• Typically based on published mortality tables

• Key considerations

• Historical trends

• Experience of individual plans

• Anti-selection

• Benefit-weighted versus participant-weighted

• Future expectations and uncertainties

• Impact on factors

14

Recent Court Cases

15

Recent court cases

• 9 cases filed against MetLife, American Airlines, PepsiCo, U.S. Bancorp, Rockwell Automation, Anheuser-Busch, Huntington Ingalls, Raytheon, and Partners Healthcare System.• Both sponsor and fiduciary defendants

• Plaintiffs receive optional forms of benefits or early retirement• QJSA, QOSA, QPSA, certain-and-life

16

Recent court cases

• Plaintiffs challenge mortality assumptions used to calculate benefits• 1951, 1971, 1983, 1984 tables (in some instances, adjusted)

• Interest rates range from 5%-7.5%

• If mortality table is unknown, challenge conversion factor

17

Recent court casesSponsor Mortality Table Interest Rate

MetLife

1971 Group Annuity Mortality Table for Males (“1971 GAM”), set back one year for

participants and five years for beneficiaries

1983 Group Annuity Table (“1983 GAM Table”) for males set back one year

6%

5%

American Airlines

1984 Unisex Pension Mortality Table (“UP 1984”) 5%

PepsiCo

Only “conversion factors” known

US Bancorp

Only “early commencement factors” known

18

Recent court casesSponsor Mortality Table Interest Rate

Rockwell

Automation

1971 GAM Table (for Main Plan)

UP 1984 Table (for the Cleveland Sub-Plan)

7%

6%

Anheuser-Busch UP 1984 Table 6.5%; 7%

Huntington Ingalls 1971 GAM Table 6%

Raytheon

1971 GAM Table; UP-84 Mortality Table

1971 TPF&C Forecast Mortality Table

PBGC rate

7%

Partners Healthcare 1951 Group Annuity Mortality Table projected to the 1960 Mortality Table,

set back 2 years for participants and 3 years for beneficiaries

7.5%

19

Recent court cases

20

Plaintiffs’ claims

21


• Assumptions do not produce actuarially equivalent benefits• Outdated/inherently unreasonable

• Result in lower benefits to participants/beneficiaries

• Cite Treasury regulations for “reasonableness” requirement

• Point to assumptions used to calculate lump sums and for accounting purposes

• Violate ERISA’s non-forfeiture requirement

• Current IRS assumptions should be used

22


• 3 claims • Declaratory and equitable relief (ERISA 502(a)(3))

• Plan does not provide actuarially-equivalent benefits and violates anti-forfeiture rule

• Order recalculating and correcting benefits and other equitable relief

• Reformation of plan (ERISA 502(a)(1) and/or (a)(3))• Reform the plan mortality tables/conversion factors to comply with ERISA’s actuarial

equivalence requirements and enforcement of plan benefits

• Breach of fiduciary duty (ERISA 502(a)(3))• Fiduciaries breached their duties by following plan terms that are not consistent with

ERISA

• Company failure to monitor fiduciaries

• Order for other equitable relief (e.g., surcharge, constructive trust, disgorgement of profits)

23

Defenses

24

Defenses

• Motions to dismiss filed in all of the cases

• Plaintiffs fail to plead necessary facts• No allegation as to appropriate conversion factor or mortality

assumptions

• No allegation as to the range of reasonableness or whether the assumptions fall outside of range

• No allegation as to when the assumptions became unreasonable, what assumptions should be used, etc.

25

Defenses

• Plaintiffs’ benefit claims fail as a matter of law• No “reasonableness” requirement in ERISA

• Contrast with funding, lump sum, and withdrawal liability provisions

• No standing or cause of action to enforce Treasury regulations under ERISA 503

• ERISA does not require the use of particular assumptions (e.g., Treasury assumptions)

• ERISA does not require plans to update assumptions• Anti-cutback rule implications

26

Defenses

• Plaintiffs’ benefit claims fail as a matter of law (cont.)• Variance of +/- 5% is deemed equivalent under Treasury

regulations

• Mortality table is a “standard mortality table” under Treasury regulations

• Benefits were calculated pursuant to plan terms

• Reformation unavailable under 502(a)(1)(B); cannot bring 502(a)(3) claim with 502(a)(1)(B) claim• Reformation requires mutual mistake or fraud

27

Defenses

• Plaintiffs’ fiduciary breach claims fail as a matter of law• The factors/assumptions do not violate ERISA

• Plan design is a settlor decision

• Have not alleged sponsor’s duty and failure to monitor

• Statute of limitations

• Failure to exhaust administrative remedies

28

Defenses

Plaintiffs’ responses

• ERISA requires benefits to be actuarially equivalent, which means equal present values • Present value must be adjusted to reflect anticipated events

• Treasury regulations provide guidance as to ERISA’s requirements

• ERISA requires reasonableness• Anti-cutback rule protects benefit amounts, not formulas

• Non-discrimination/present value regulations inapplicable

29

Court decisions

Martinez v. American Airlines

• Plaintiffs sufficiently allege violation of ERISA actuarial equivalence requirement• Discovery needed to determine whether assumptions are

reasonable and meet ERISA’s requirements

• Non-disclosure regulations do not apply

30

Court decisions

Smith v. U.S. Bancorp

• Plaintiffs’ claims arise under ERISA; Treasury regulations provide guidance

• Actuarial equivalence requires that present values of two payment streams are equal• Discovery is needed to determine whether these requirements

are met

• Sufficient facts plead on failure to monitor

• Statute of limitations issues not raised by facts in complaint

31

Considerations for sponsors and administrators

32

Considerations for sponsors and administrators

• Review of plan documents through counsel

• Careful tracking of and response to participant inquiries

• Look out for plaintiffs’ firms’ solicitation

• Control messaging

• Wait-and-see? Consider amending?• Only two decisions on motions to dismiss

• No court has addressed merits

a challenge to actuarial assumptions in defined...

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