Do Cases Questioning Mortality Tables Used to Determine DB Plan Benefits Indicate a New Trend?

Cases have been filed against MetLife, Pepsi and American Airlines saying the use of outdated mortality tables in determining annuity payments causes retirees to lose part of their vested retirement benefits.

The same law firms representing plaintiffs in a case against Metropolitan Life Insurance Company (MetLife) alleging its use of an outdated mortality table violated Employee Retirement Income Security Act (ERISA) rules for calculating annuity benefits under its defined benefit (DB) plans has filed two similar lawsuits against PepsiCo Inc. and American Airlines Inc.

All three lawsuits name as defendants the companies and their benefits committees or boards, and the suit against Pepsi also names the PepsiCo Administration Committee. The case against American Airlines applies to several DB plans sponsored by the company.

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The lawsuits say they are filed concerning the failure to pay benefits under the plan that are actuarially equivalent to a single life annuity for the life of the plan participant, as required by Section 205 of ERISA. “By not offering actuarially equivalent pension benefits, defendants are causing retirees to lose part of their vested retirement benefits,” the complaints state.

The lawsuits state that ERISA requires that pension plans offer married retirees the option of receiving a payment stream for their life and their spouse’s life after the retiree dies (a joint and survivor annuity). ERISA requires that joint and survivor annuities be “actuarially equivalent” to a single-life annuity, meaning that the present value of the payment streams must be the same.

Actuarial assumptions are applied to calculate the present value of the future payments of a joint and survivor annuity. As the lawsuits point out, these assumptions are based on a set of mortality tables and long-term interest rates. They also point out that mortality rates have improved over time with advances in medicine and better collective lifestyle habits. People who are retiring now are expected to live longer than those who retired in previous generations. “Older morality tables predict that people will die at a faster rate than current mortality tables. Using an older mortality table with accelerated mortality rates decreases the present value of the joint and survivor annuity and, ultimately, the monthly payment that retirees receive under a joint and survivor annuity,” the complaints state.

The complaint against Pepsi says rather than using reasonable interest and mortality rates to set the conversion factor to determine an equivalent benefit between the default single-life annuity and the joint and survivor annuity selected by a retiree, the plan instead sets a conversion factor for each category of joint and survivor annuity that is lower than the conversion factor that would be generated using reasonable market mortality tables and interest rates.

The complaint against American Airlines says, “While a 5% interest rate could be reasonable, and fair based on the economic conditions during the class period, American’s use of the UP 1984 mortality table is inherently unreasonable because of its outdated accelerated mortality rates.”

In all three cases, the plaintiffs seek an order from the court reforming the plan or plans to conform to ERISA, payment of future benefits in accordance with the reformed plan(s) as required under ERISA, payment of amounts improperly withheld, and such other relief as the court determines to be just and equitable.

A Benefits Brief from Groom Law Group says, “The similarities in the complaints, and the fact that the same two law firms filed the complaints, suggest that additional lawsuits against other large pension plan sponsors may soon follow.” The law firm also warns that, “For the many remaining corporate sponsors of older pension plans, these cases may present a new area of potential legal exposure.”

(b)lines Ask the Experts – What Is a Retirement Income Account?

Experts from Groom Law Group and Cammack Retirement Group answer questions concerning 403(b) plans and regulations.

“What is a retirement income account?”

Stacey Bradford, Kimberly Boberg, David Levine and David Powell, with Groom Law Group, and Michael A. Webb, vice president, Retirement Plan Services, Cammack Retirement Group, answer:

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A retirement income account described in Code section 403(b)(9) is generally a defined contribution program established or maintained by a church employer (including a church, convention or association of churches, or an organization described in Code section 414(e)(3)(A)), although church section 403(b) defined benefit plans that were in existence on August 12, 1982 are grandfathered. A retirement income account covers church employees and ministers, including certain ministers who do not work for a church but are eligible to contribute to a church retirement income account and deduct such contributions on their tax returns (subject to the annual IRS limits on contributions).

A retirement income account is treated as a section 403(b) annuity contract, and is subject to many of the same rules. However, there are some differences, including that a retirement income account may be exempt from nondiscrimination requirements and is not restricted in the kinds of investments it may hold.  Importantly, the retirement income account must (1) have a written plan document, unlike section 403(b)(1) annuity contracts maintained by churches, (2) specifically designate the 403(b) plan as a section 403(b)(9) retirement income account, and (3) be held for the exclusive benefit of the employee and his or her beneficiaries. A church employer may also use a retirement income account in conjunction with annuity contracts and custodial accounts. In such case, the entire plan will be subject to the rules applicable to retirement income accounts.

The assets of a retirement income account may be commingled with other assets for investment purposes. Such assets may be commingled with “other church assets”, but must be separately accounted for and must continue to satisfy the exclusive benefit requirement. Other church assets include assets devoted entirely to church purposes and assets of other church retirement and employee benefit programs. Further, retirement income account assets may be commingled in a group trust with assets of other retirement plans, including section 401(a) qualified plans, individual retirement accounts, and section 403(b)(7) custodial accounts (subject to certain restrictions).

 

NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.

 

Do YOU have a question for the Experts? If so, we would love to hear from you! Simply forward your question to Rebecca.Moore@strategic-i.com with Subject: Ask the Experts, and the Experts will do their best to answer your question in a future Ask the Experts column.

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