More DB Plan Sponsors Facing Lawsuits Over Use of Outdated Mortality Tables

As cases against MetLife, Pepsi and American Airlines have been filed, Groom Law Group questions whether these cases may present a new area of potential legal exposure.

The same law firms representing plaintiffs in a case against Metropolitan Life Insurance Company (MetLife) alleging its use of an outdated mortality table violated Employee Retirement Income Security Act (ERISA) rules for calculating annuity benefits under its defined benefit (DB) plans has filed two similar lawsuits against PepsiCo Inc. and American Airlines Inc.

All three lawsuits name as defendants the companies and their benefits committees or boards, and the suit against Pepsi also names the PepsiCo Administration Committee. The case against American Airlines applies to several DB plans sponsored by the company.

The lawsuits say they are filed concerning the failure to pay benefits under the plan that are actuarially equivalent to a single life annuity for the life of the plan participant, as required by Section 205 of ERISA. “By not offering actuarially equivalent pension benefits, defendants are causing retirees to lose part of their vested retirement benefits,” the complaints state.

The lawsuits state that ERISA requires that pension plans offer married retirees the option of receiving a payment stream for their life and their spouse’s life after the retiree dies (a joint and survivor annuity). ERISA requires that joint and survivor annuities be “actuarially equivalent” to a single-life annuity, meaning that the present value of the payment streams must be the same.

Actuarial assumptions are applied to calculate the present value of the future payments of a joint and survivor annuity. As the lawsuits point out, these assumptions are based on a set of mortality tables and long-term interest rates. They also point out that mortality rates have improved over time with advances in medicine and better collective lifestyle habits. People who are retiring now are expected to live longer than those who retired in previous generations. “Older morality tables predict that people will die at a faster rate than current mortality tables. Using an older mortality table with accelerated mortality rates decreases the present value of the joint and survivor annuity and, ultimately, the monthly payment that retirees receive under a joint and survivor annuity,” the complaints state.

The complaint against Pepsi says rather than using reasonable interest and mortality rates to set the conversion factor to determine an equivalent benefit between the default single-life annuity and the joint and survivor annuity selected by a retiree, the plan instead sets a conversion factor for each category of joint and survivor annuity that is lower than the conversion factor that would be generated using reasonable market mortality tables and interest rates.

The complaint against American Airlines says, “While a 5% interest rate could be reasonable, and fair based on the economic conditions during the class period, American’s use of the UP 1984 mortality table is inherently unreasonable because of its outdated accelerated mortality rates.”

In all three cases, the plaintiffs seek an order from the court reforming the plan or plans to conform to ERISA, payment of future benefits in accordance with the reformed plan(s) as required under ERISA, payment of amounts improperly withheld, and such other relief as the court determines to be just and equitable.

A Benefits Brief from Groom Law Group says, “The similarities in the complaints, and the fact that the same two law firms filed the complaints, suggest that additional lawsuits against other large pension plan sponsors may soon follow.” The law firm also warns that, “For the many remaining corporate sponsors of older pension plans, these cases may present a new area of potential legal exposure.”