Upload
others
View
1
Download
0
Embed Size (px)
Citation preview
A Challenge to Actuarial Assumptions in Defined Benefit Plans: Are Optional Forms of Benefits Actuarially Equivalent?Recent Case Law, Claims and Defenses, Fiduciary Obligations, Avoiding Administrative Pitfalls, Plan Modifications
Today’s faculty features:
1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific
The audio portion of the conference may be accessed via the telephone or by using your computer's
speakers. Please refer to the instructions emailed to registrants for additional information. If you
have any questions, please contact Customer Service at 1-800-926-7926 ext. 1.
TUESDAY, SEPTEMBER 17, 2019
Presenting a live 90-minute webinar with interactive Q&A
Katherine B. Kohn, Of Counsel, Groom Law Group, Washington, D.C.
Brian J. Lamb, Partner, Thompson Hine, Cleveland
Joshua Shapiro, Senior Actuarial Advisor, Groom Law Group, Washington, D.C.
Tips for Optimal Quality
Sound Quality
If you are listening via your computer speakers, please note that the quality
of your sound will vary depending on the speed and quality of your internet
connection.
If the sound quality is not satisfactory, you may listen via the phone: dial
1-877-447-0294 and enter your Conference ID and PIN when prompted.
Otherwise, please send us a chat or e-mail [email protected] immediately
so we can address the problem.
If you dialed in and have any difficulties during the call, press *0 for assistance.
Viewing Quality
To maximize your screen, press the ‘Full Screen’ symbol located on the bottom
right of the slides. To exit full screen, press the Esc button.
FOR LIVE EVENT ONLY
Continuing Education Credits
In order for us to process your continuing education credit, you must confirm your
participation in this webinar by completing and submitting the Attendance
Affirmation/Evaluation after the webinar.
A link to the Attendance Affirmation/Evaluation will be in the thank you email
that you will receive immediately following the program.
For additional information about continuing education, call us at 1-800-926-7926
ext. 2.
FOR LIVE EVENT ONLY
Program Materials
If you have not printed the conference materials for this program, please
complete the following steps:
• Click on the link to the PDF of the slides for today’s program, which is located
to the right of the slides, just above the Q&A box.
• The PDF will open a separate tab/window. Print the slides by clicking on the
printer icon.
FOR LIVE EVENT ONLY
A Challenge to Actuarial Assumptions in Defined Benefit Plans:
Are Optional Forms of Benefits Actuarially Equivalent?
Katherine Kohn, Esq.
Brian Lamb, Esq.
Josh Shapiro
6
Agenda
I. Overview of actuarial assumptions
II. Recent court cases
III.Plaintiffs’ claims
IV.Defenses
V. Court decisions
VI.Considerations for plan sponsors and administrators
7
Overview of actuarial assumptions
8
Overview of actuarial assumptions
• Applications to plan administration
• Optional forms of benefit
• Early / late retirement
• Sources of uncertainty
• Lifespans are unknown
• Time value of money (i.e. discount rate)
9
Overview of actuarial assumptions
• Case study: joint and survivor annuity
• Plan benefit expressed as a single life annuity
• Participant may elect a J&S annuity
• Portion of benefit will continue to surviving spouse
• Joint and survivor benefit
• On the average, benefit is paid for a longer period of time
• Lower payment amount needed for equivalence
• Reduction expressed as a J&S factor (e.g. 95%)
10
Overview of actuarial assumptions
• J&S factor may vary based on:
• Age of participant at retirement
• Age of spouse at retirement
• Percentage of benefit payable to surviving spouse
• Other considerations
• Gender of participant and spouse
• Health status
• Simplified factors
11
Overview of actuarial assumptions
• Actuarial assumptions
• Used where future events are unknown
• Mortality table
• Discount rate
• Other assumptions
• Concept of reasonableness
12
Overview of actuarial assumptions
• Plan administration
• Maintain actuarial equivalence of benefits
• Assumptions specified in plan document
• Prescribed by IRS for lump sums
• Actuarial valuations
• Funding and accounting requirements
• Funding discount rate and mortality prescribed by IRS
• Other assumptions generally selected by actuary
13
Overview of actuarial assumptions
• Mortality assumptions
• Typically based on published mortality tables
• Key considerations
• Historical trends
• Experience of individual plans
• Anti-selection
• Benefit-weighted versus participant-weighted
• Future expectations and uncertainties
• Impact on factors
14
Recent Court Cases
15
Recent court cases
• 9 cases filed against MetLife, American Airlines, PepsiCo, U.S. Bancorp, Rockwell Automation, Anheuser-Busch, Huntington Ingalls, Raytheon, and Partners Healthcare System.• Both sponsor and fiduciary defendants
• Plaintiffs receive optional forms of benefits or early retirement• QJSA, QOSA, QPSA, certain-and-life
16
Recent court cases
• Plaintiffs challenge mortality assumptions used to calculate benefits• 1951, 1971, 1983, 1984 tables (in some instances, adjusted)
• Interest rates range from 5%-7.5%
• If mortality table is unknown, challenge conversion factor
17
Recent court casesSponsor Mortality Table Interest Rate
MetLife
1971 Group Annuity Mortality Table for Males (“1971 GAM”), set back one year for
participants and five years for beneficiaries
1983 Group Annuity Table (“1983 GAM Table”) for males set back one year
6%
5%
American Airlines
1984 Unisex Pension Mortality Table (“UP 1984”) 5%
PepsiCo
Only “conversion factors” known
US Bancorp
Only “early commencement factors” known
18
Recent court casesSponsor Mortality Table Interest Rate
Rockwell
Automation
1971 GAM Table (for Main Plan)
UP 1984 Table (for the Cleveland Sub-Plan)
7%
6%
Anheuser-Busch UP 1984 Table 6.5%; 7%
Huntington Ingalls 1971 GAM Table 6%
Raytheon
1971 GAM Table; UP-84 Mortality Table
1971 TPF&C Forecast Mortality Table
PBGC rate
7%
Partners Healthcare 1951 Group Annuity Mortality Table projected to the 1960 Mortality Table,
set back 2 years for participants and 3 years for beneficiaries
7.5%
19
Recent court cases
20
Plaintiffs’ claims
21
Plaintiffs’ claims
• Assumptions do not produce actuarially equivalent benefits• Outdated/inherently unreasonable
• Result in lower benefits to participants/beneficiaries
• Cite Treasury regulations for “reasonableness” requirement
• Point to assumptions used to calculate lump sums and for accounting purposes
• Violate ERISA’s non-forfeiture requirement
• Current IRS assumptions should be used
22
Plaintiffs’ claims
• 3 claims • Declaratory and equitable relief (ERISA 502(a)(3))
• Plan does not provide actuarially-equivalent benefits and violates anti-forfeiture rule
• Order recalculating and correcting benefits and other equitable relief
• Reformation of plan (ERISA 502(a)(1) and/or (a)(3))• Reform the plan mortality tables/conversion factors to comply with ERISA’s actuarial
equivalence requirements and enforcement of plan benefits
• Breach of fiduciary duty (ERISA 502(a)(3))• Fiduciaries breached their duties by following plan terms that are not consistent with
ERISA
• Company failure to monitor fiduciaries
• Order for other equitable relief (e.g., surcharge, constructive trust, disgorgement of profits)
23
Defenses
24
Defenses
• Motions to dismiss filed in all of the cases
• Plaintiffs fail to plead necessary facts• No allegation as to appropriate conversion factor or mortality
assumptions
• No allegation as to the range of reasonableness or whether the assumptions fall outside of range
• No allegation as to when the assumptions became unreasonable, what assumptions should be used, etc.
25
Defenses
• Plaintiffs’ benefit claims fail as a matter of law• No “reasonableness” requirement in ERISA
• Contrast with funding, lump sum, and withdrawal liability provisions
• No standing or cause of action to enforce Treasury regulations under ERISA 503
• ERISA does not require the use of particular assumptions (e.g., Treasury assumptions)
• ERISA does not require plans to update assumptions• Anti-cutback rule implications
26
Defenses
• Plaintiffs’ benefit claims fail as a matter of law (cont.)• Variance of +/- 5% is deemed equivalent under Treasury
regulations
• Mortality table is a “standard mortality table” under Treasury regulations
• Benefits were calculated pursuant to plan terms
• Reformation unavailable under 502(a)(1)(B); cannot bring 502(a)(3) claim with 502(a)(1)(B) claim• Reformation requires mutual mistake or fraud
27
Defenses
• Plaintiffs’ fiduciary breach claims fail as a matter of law• The factors/assumptions do not violate ERISA
• Plan design is a settlor decision
• Have not alleged sponsor’s duty and failure to monitor
• Statute of limitations
• Failure to exhaust administrative remedies
28
Defenses
Plaintiffs’ responses
• ERISA requires benefits to be actuarially equivalent, which means equal present values • Present value must be adjusted to reflect anticipated events
• Treasury regulations provide guidance as to ERISA’s requirements
• ERISA requires reasonableness• Anti-cutback rule protects benefit amounts, not formulas
• Non-discrimination/present value regulations inapplicable
29
Court decisions
Martinez v. American Airlines
• Plaintiffs sufficiently allege violation of ERISA actuarial equivalence requirement• Discovery needed to determine whether assumptions are
reasonable and meet ERISA’s requirements
• Non-disclosure regulations do not apply
30
Court decisions
Smith v. U.S. Bancorp
• Plaintiffs’ claims arise under ERISA; Treasury regulations provide guidance
• Actuarial equivalence requires that present values of two payment streams are equal• Discovery is needed to determine whether these requirements
are met
• Sufficient facts plead on failure to monitor
• Statute of limitations issues not raised by facts in complaint
31
Considerations for sponsors and administrators
32
Considerations for sponsors and administrators
• Review of plan documents through counsel
• Careful tracking of and response to participant inquiries
• Look out for plaintiffs’ firms’ solicitation
• Control messaging
• Wait-and-see? Consider amending?• Only two decisions on motions to dismiss
• No court has addressed merits