Appellate Court Affirms Top Hat Plan Change in Crediting Rate

The court opinion notes that one of the plaintiffs retired in March 2012 and one retired in September 2012. Neither plaintiffs’ account decreased in value at the time the 2012 amendment took place.

On May 20, 2013, the plaintiffs each sent CSC a letter claiming benefits under the plan before the change in the crediting rate, but CSC denied their claims on July 22, 2013. The plaintiffs then filed a lawsuit.

The plaintiffs challenge three features of the 2012 amendment: the change to the crediting rate; the introduction of potential for risk and volatility into the plan; and variations in annual distributions, which they argue are no longer “approximately equal.”

Regarding the amendment of the crediting rate, the appellate court found a plain reading of the plan permits the plan’s board to change the crediting rate so long as the change does not decrease the value of a participant’s notational account at the time of amendment. The plan also generally requires that administration be uniform and consistent. The 2012 amendment did not decrease the value of any notational account at the time the amendment took effect and applied uniformly to all participants.

With regard to the introduction of risk and volatility into the plan, the court said the plaintiffs seek to read into the plan a guarantee that simply does not exist. The opinion says the “Plan’s textual requirements—that there be uniform administration of participants’ accounts and that amendments not reduce the value of these accounts at the time of amendment—limited the Board’s discretion in meaningful ways. For example, CSC could not apply a negative crediting rate, because this would reduce the value of accounts at the time the amendment took effect. Furthermore, the Plan administrator could not exclude Appellants’ accounts from the 2012 Amendment because this might violate the requirement of uniform administration.” But, the court noted that the text of the plan document does not limit the board’s selection of a crediting rate in the way in which the plaintiffs argue. “The relative level of risk or volatility in a crediting rate merely follows from the crediting rate that the Board selects, and the Plan places no limit on a crediting rate’s exposure to market-based risk. Phrased differently, since the Plan made no promises about the levels of risk or volatility in the crediting rate, the 2012 Amendment could not render such a promise illusory,” the opinion says.

Finally, the appellate court noted that since the 2012 amendment, eligible participants’ payments are no longer the same from year to year, but CSC still pays participants in “approximately equal annual installments.” According to the opinion, because the new crediting rate introduced the potential for more market volatility into participants’ notational accounts, CSC developed a process of dividing the amount in a retired participant’s notational account in a given year by the number of years remaining under the plan.  By doing so, CSC achieves “approximately equal” annual payments to eligible participants. 

The court pointed out that in practice, these payments cannot be strictly equal over time. “CSC cannot predict the actual performance of an S&P index fund over a year’s time, much less over a decade, and even if CSC attempted to predict future performance of a particular valuation fund, it still could not predict how a participant’s allocation decisions across funds might influence future credited earnings or losses,” the opinion says. “Participants who select valuation funds with lower but steadier rates can expect similar annual installment payments, while participants who select riskier but possibly more rewarding valuation funds can expect greater variation from year to year.”

The court concluded that the new system cannot deliver more than “approximately equal” annual payments, but this is all that the plan document requires.