A federal judge has ruled for a class of retirees in a lawsuit alleging their benefits from Colgate-Palmolive’s Employees’ Retirement Income Plan were calculated in error.
According to the decision by U.S. District Judge Lorna G. Schofield of the U.S. District Court for the Southern District of New York, the plan originally operated as a traditional defined benefit (DB) plan, which guaranteed that each participant receive an accrued benefit expressed as an annuity upon reaching age 65. Prior to July 1, 1989, the plan determined the level of benefits using a final average pay formula based on a participant’s final average earnings and years of credited service—called in the decision the “grandfathered formula.” Effective July 1, 1989, the plan was converted to a cash balance plan and allowed participants to elect to receive their benefits either as a lump sum or an annuity.
Schofield noted that Internal Revenue Code (IRC) Section 417(e) and Employee Retirement Income Security Act (ERISA) Section 205(g) require any lump-sum payment to be no less than the actuarial equivalent of the participant’s accrued benefit expressed as a single life annuity payable at normal retirement age. For participants who received their benefit between 1989 and 2002, the plan document provided that a projection rate of the 20-year Treasury bill interest rate plus 1% be used to determine the present value of participants’ accrued benefit when calculating a lump-sum payment. The discount rate to determine the present value of the accrued benefit at the time of the adoption of the plan in 1989 until February 28, 2002, was a blend of interest rates equal to the Pension Benefit Guaranty Corporation (PBGC) rate. The 20+1% rate from 1989 through February 28, 2002, was consistently and substantially higher than the PBGC rate, according to the court document.
When the cash balance plan was adopted, employees who were then still employed by Colgate were given the option to make contributions to continue to accrue benefits under the grandfathered formula. If a participant elected to make these contributions, and did so until separation from service, he would be entitled to a benefit no less than his accrued benefit under the cash balance plan formula plus his employee contributions to maintain the grandfathered formula, in the form of either a lump sum or an annuity. In 2004, it came to Colgate’s attention that the lump-sum payments the plan had been paying to such participants were less than the participants would have otherwise received had they elected to receive an annuity.
In 2005, the company adopted a residual annuity amendment (RAA) to address the potential illegal forfeiture of benefits. The RAA granted a residual annuity to any participant who elected a lump-sum payment upon separation. After the retirement plan committee adopted the RAA in 2005, it was implemented only for those participants who retired after March 2005, even though the RAA was effective as of July 1, 1989. Retroactive implementation of the RAA did not occur at that time for participants who had retired between July 1989 and February 2005.
Schofield’s decision recounts that in 2007, a class action lawsuit was filed on behalf of several thousand participants against Colgate, alleging that their pension benefits had been miscalculated. In May 2010, the parties in the lawsuit reached an agreement in principle to settle that case. Once the plaintiffs’ counsel received a copy of the RAA, all RAA-related claims were carved out of the settlement agreement. After the settlement, the defendants retroactively applied the RAA, granting millions of dollars of additional annuity benefits to a few hundred participants who had taken a lump-sum payment between 1989 and 2005.
In 2014, the lead plaintiff in the current case submitted a claim letter to the retirement plan committee, stating that she was entitled to an RAA annuity in addition to the lump-sum payment she had received in 1994. She was told that certain calculations showed she was not eligible for the RAA annuity. When she appealed that denial, she pointed to errors in the calculations, but her appeal was also denied.
These errors were challenged in the lawsuit that she filed in 2016. Schofield first determined that “based on the unambiguous terms of the plan,” Colgate’s interpretation of how to determine who is entitled to an RAA annuity benefit, and the amount of any such benefit “is erroneous as a matter of law.”
The plaintiffs represented by the lawsuit also argued that the defendants improperly used a pre-retirement mortality discount (PRMD) to determine their RAA annuity in the calculation of the age-65 actuarial equivalence for the period prior to age 65. This applies to all calculations under the RAA, including participants who were already paid a residual annuity prior to 2014. Though the PRMD is called for by the plan, the plaintiffs claimed that the use of the PRMD violates ERISA’s and the IRC’s actuarial equivalence rules. Schofield noted that the defendants did not oppose the plaintiffs’ arguments regarding this error in their opposition brief, so “summary judgment is granted on this ground alone.”
However, Schofield also considered prior case law findings presented by the plaintiffs and found the reasoning to be persuasive. “Here, a PRMD is used to determine the present value of the age-65 [actuarial equivalent] of [a participant’s lump-sum payment]—a benefit that must be paid in all events and does not decrease if the participant dies prior to reaching age 65. This results in a present value that is less than the corresponding normal retirement benefit and therefore violates” IRC Section 417(e),” she wrote in her decision.
Schofield directed the defendants to calculate or recalculate, in a manner consistent with her opinion, all residual annuities for each member of the class and pay the corrected residual annuity. However, she stayed the relief to allow time for an appeal.