Delta Air Line’s Interest Rate and Mortality Assumptions Challenged in Court

A new Employee Retirement Income Security Act (ERISA) lawsuit has been filed in the U.S. District Court for the District of Nevada, naming as defendants Delta Air Lines Inc. and a number of administrative committees and individuals tasked with operating the company’s pension plans.

The lawsuit resembles other “actuarial equivalence” challenges filed under ERISA against major U.S.-based employers in recent years. The suits are focused on the actuarial equivalence—or lack thereof—of different forms of annuities paid out by pension plans sponsored by the employers. Thus far, the cases have reached mixed results, with some being cleared for discovery, some being dismissed outright on technical grounds and others reaching rapid settlements. 

In all the cases, including the new Delta Air Lines matter, the plaintiffs claim their employers are failing to pay the full promised value of “alternative annuity benefits” defined by the plan. The suits say this generally happens because the plan sponsors are allegedly using outdated mortality assumptions and interest rate calculations while converting standard annuity payments into alternative options, such as annuities that include spousal survivor benefits, also known as joint and survivor annuities (JSAs).

As stated in the new complaint, mortality assumptions for participants and beneficiaries and interest rate assumptions together generate a “conversion factor,” which expresses the dollar amount of one form of the pension’s monthly benefit as a fraction of the dollar amount of the alternative monthly benefit. The plaintiffs state that if a plan’s “conversion factor” for JSA benefits, relative to either the standard life annuity (SLA) benefit or a more valuable plan benefit, is lower than the conversion factor that would be generated from reasonable actuarial assumptions about mortality and interest rates, then the plan’s alternative benefits are not actuarially equivalent.

The complaint alleges that the Delta Air Lines plans’ conversion factors for calculating JSA benefits are lower than the conversion factors generated by reasonable actuarial assumptions, resulting in the payment of JSA benefits that are not actuarially equivalent to the SLA benefits participants could elect to take instead.

“Under the plans, the defendants use a .90 conversion factor to calculate a 50% joint and survivor annuity and a .80 conversion factor to calculate a 100% joint and survivor annuity,” the complaint states. “These conversion factors do not provide participants with actuarially equivalent benefits. For a 65-year-old participant with a 65-year-old spouse, the conversion factor for the 50% JSA in 2020, based on reasonable actuarial assumptions, would have been .92, or 2.3% higher than what the plans pay. The conversion factor for the 100% JSA would have been .85, or 6.6% more than the plans pay.”

The plaintiffs suggest the plans’ conversion factors thus depress the present value of benefits received as a JSA, resulting in benefits that are materially lower than the actuarial equivalent of the plans’ SLA benefits.

“In sum, Delta is causing the plaintiff and class members to receive less than they should as a pension each month, which will continue to affect them throughout their retirements,” the complaint states.

One unique feature in this lawsuit relative to the previous related suits is the plaintiffs’ allegation that the several pension plans in question do not identify the actuarial assumptions upon which the conversion factors set out in the plans’ tables to calculate the 50%, 75% or 100% JSAs are based.

“It is likely that the plans’ conversion factors were set decades ago, when mortality rates were significantly higher, and were never updated,” the plaintiffs allege. “One plan’s conversion factors, for example, have not changed since 1996. Regardless of the reason, however, the conversion factors shown in the tables are unreasonably low compared to the conversion factors generated by using actuarial assumptions that were reasonable at any time during the last decade.”

The full text of the complaint is available here. Delta Air Lines has not yet responded to a request for comment about the allegations.