By Pension and Benefits Editorial Staff
Participants in a defined benefit plan maintained by Anheuser-Busch were allowed by a federal trial court in Missouri to proceed with a challenge to the company’s use of outdated 1984 mortality tables in determining pension benefits. The participants sufficiently alleged that Anheuser-Busch used unreasonable mortality factors that resulted in annuity payments that failed to meet ERISA’s actuarial equivalence requirement.
Outdated mortality table used in determining present value of benefits. Anheuser-Busch (A-B) maintains a defined benefit pension plan that includes five sub-plans. Participants in the plans may receive pension payments in various forms, including a single-life annuity, a joint and survivor annuity, or a certain-and-life annuity.
In converting single life annuities to joint and survivor and certain-and-life annuities, A-B’s plan used the shorter life expectancies set forth in the 1984 mortality table issued by the Society of Actuaries. Using the outdated 1984 table, instead of the more recent 2014 table, decreased the value of the joint and survivor annuities and the certain-and-life annuities relative to the single-life annuity, effectively shortchanging participants (and their spouses) by artificially decreasing benefit payments.
A participant in the A-B plan brought a putative class action suit, alleging that all participants and beneficiaries who received a joint and survivor or certain-and-life annuity under the A-B plan were not receiving an actuarially equivalent form of benefit because the present value of the benefit was not equivalent to that of the single life annuity they had earned. According to the lead plaintiff, A-B, by using the 1984 table, reduced the present value of his benefit at the time of retirement by $4,385.50. The participants sought not only to recover lost benefits, but reformation of the plan.
A-B moved to dismiss the case, essentially maintaining, through five arguments, that its use of the 1984 mortality table was reasonable and not prohibited by ERISA. The court denied the motion.
Actuarial assumptions unreasonable. Initially, A-B argued that ERISA grants plans “wide latitude” in selecting actuarial assumptions and does not require employers to use a particular interest rate or mortality table when calculating the actuarially equivalent value of benefits. In addition, A-B maintained, the participants were also required to plead that the plan’s assumptions could not have been produced by any reasonable set of actuarial assumptions.
In dismissing the argument, the court determined that the participants had sufficiently alleged that A-B used unreasonable actuarial factors that resulted in benefits that failed to meet ERISA’s actuarially-equivalence requirement. The court found no support for A-B’s contention that the participants were further required to show that their benefit payment could not have been produced by a reasonable set of actuarial assumptions.
10 percent range allowed in description of benefits not applicable. A-B next contended that the difference between the benefit the lead plaintiff received and the benefit to which he claimed to be entitled, fell well within the 10 percent range that Treasury Regulations authorize plans to use in describing benefits.
The court noted that IRS Reg. 1.417(a)(3)-1 allows plan sponsors, when making disclosures to participants, explaining available optional forms of benefit (e.g., joint and survivor annuity), to calculate the expected future value of different benefits within a 10 percent range. However, the court explained, the benefit distribution rules under IRS Reg. 1.401(a)-11(b)(2), do not allow plan sponsors such latitude. Thus, when calculating the amount of a benefit actually to be paid to a participant, a plan sponsor must ensure that the joint and survivor annuity is the actuarial equivalent of the normal form of life annuity. Under this standard, the court stressed, A-B’s compliance with the disclosure regulation did not make the actuarial assumption it used in the calculation of actuarial equivalence reasonable.
Actuarial assumptions unreasonable in aggregate. A-B further argued that ERISA only requires that actuarial adjustments be reasonable in the aggregate, and not that the reasonableness of each component of an actuarial calculation be determined in isolation. According to A-B, the participants were required to allege that the application of the plan’s interest and mortality factors together resulted in an unreasonable reduction in benefits.
The court rejected the argument that the participants were required to challenge each component of an actuarial assumption. The participant’s complaint contained sufficient factual allegations to support their argument that the plan’s actuarial assumptions were unreasonable because of the use of the 1984 mortality table.
Use of 1984 table in nondiscrimination regulations not relevant. A-B next maintained that the use of the 1984 table was reasonable because it remains a standard mortality table under IRS Reg. 1.401(a)(4)-3(f)(7). However, the court found the regulation, which applies to the nondiscrimination requirements, to be inapplicable to the actuarial equivalence requirements.
Periodic updates of assumptions. Finally, A-B, relying on the Second Circuit’s ruling in McCarthy v. Dun & Bradstreet (CA-2 (2007) 482 F3d 184), contended that ERISA does not require pension plans to periodically adjust their interest rate and mortality assumptions. The court, however, noted that the Second Circuit’s ruling was limited, and did not hold that a plan never has to update its actuarial assumptions and may continue to use unreasonable assumptions.
Moreover, the court stressed, the participants were not alleging that A-B needed to periodically update any of the plan’s actuarial assumptions. The participants were merely arguing that the actuarial assumptions A-B used to calculate alternative benefits were unreasonable and failed to comply with ERISA’s actuarial equivalence requirement. Satisfying this pleading standard, the court concluded, was sufficient for the case to move forward.
Source: Duffy v. Anheuser-Busch Companies, LLC (DC MO).
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