When determining alternative pension benefits (such as joint and survivor annuities and early retirement benefits), a recent court decision held that underlying actuarial assumptions selected decades ago do not violate federal law simply because they are outdated and may result in a pension benefit that is less than using more current actuarial assumption.
Pension benefits are often structured as a single life annuity at a plan-designated normal retirement age. However, under federal law, the plan must pay the retirement benefits to a married participant in the form of a joint and survivor annuity – unless waived. In addition, many pension plans offer an early retirement benefit for participants that retire before the plan’s normal retirement age. Federal law requires that any retirement benefit that is not a single life annuity must be the actuarial equivalent of a single life annuity.
There are two main factors (actuarial assumptions) used to determine actuarial equivalence: interest rate and mortality table. Over the past several years, plan participants have initiated class action lawsuits alleging that their pension plan’s joint and survivor annuity and early retirement benefits are not the actuarial equivalent of a single life annuity because the mortality tables and interest rates used are not reasonable. These actuarial assumptions are not reasonable, the argument goes, because they are old and outdated, no longer reflecting current mortality and interest rates.
The use of older mortality tables is common as many of the defined benefit pension plans were created more than 30 years ago and federal law requires that the plan chose and include both the mortality table and interest rate in the Plan Document. The issue in these actuarial equivalence lawsuits is whether the continued use of dated mortality tables and inflated interest rates provide for actuarial equivalence for those receiving a benefit other than a single life annuity. In other words, is a joint and survivor annuity calculated using a mortality table and interest rate selected in the 1960s the actuarial equivalent of single life annuity for those recently retired?
As the technical requirements of the statute have been met, the answer may depend on whether there is a reasonableness requirement. In assessing this question, the United States District Court for the District of Massachusetts held that the applicable law does not have a reasonableness requirement and as long as the technical requirements are met, there is no violation of federal law. See Belknap v. Partners Healthcare System, Inc., et al, Civ. No. 19-11437-FDS, 2022 WL 658653 (D. Mass. Mar. 4, 2022).
A retiree brought a class action against his former employer, Partners HealthCare System, Inc. (Partners), alleging that the early retirement joint and survivor annuity benefits from Partners’ defined benefit pension plan could not be actuarially equivalent to the plan’s single life annuity because it used inflated interest rates and outdated mortality tables to calculate these alternate benefits. The claim alleged that the Partners’ plan used a 1951 Adjusted Mortality Table and interest rate of 7.5% and that the use of such dated actuarial assumptions was unreasonable under applicable law. Partners moved to dismiss the complaint for lack of standing and failure to state a claim. The court declined to dismiss on standing grounds, converted the motion to dismiss to a motion for summary judgment and then granted the motion in favor of Partners.
In deciding the motion for summary judgment, the court accepted as true the plaintiff’s disputed allegation that the use of the 1951 Adjusted Mortality Table and 7.5% interest rate reduced the present value of the alternate benefits when compared to present day mortality tables and interest rates. The court then focused on whether the applicable statute that requires actuarial equivalence, ERISA Section 1054(c)(3), also requires that the underlying actuarial assumptions be reasonable. As the plain language of the statue does not have a reasonableness requirement, the plaintiff argued that the term “actuarial equivalent” either requires or implies a reasonableness standard.
The court rejected the argument that there was any reasonableness standard required by the statute, noting first that such omission is generally assumed to be deliberate. The court noted that Congress had placed reasonableness standards for actuarial assumptions in other parts of ERISA such as the determination of withdrawal liability. The court also analyzed other ways that the term “actuarial equivalent” could include a reasonableness standard but rejected each of those as well: no regulation, case law or accepted meaning among actuarial experts included a reasonableness component. Having reached the conclusion that there was no requirement that an actuarially equivalent benefit must be based on reasonable actuarial assumptions, the court granted summary judgment in favor of Partners.
Faegre Drinker Perspective: As these mortality table lawsuits wind their way through the litigation process, it is still too early to make definitive predictions about a consensus in the case law. We recommend that plan sponsors of defined benefit plans review the actuarial assumptions used to calculate the alternative benefits with their actuaries and discuss with counsel whether any changes should be made. Faegre Drinker’s employee benefits attorneys are available to assist with these issues.