Former employees of Pinnacle West, an electric utility company in Arizona, allege that the company used outdated and unreasonable actuarial tables to undervalue their defined benefit pension benefits by underestimating the participants’ life expectancy.

The Employee Retirement Income Security Act suit was filed in the Federal District Court of Arizona.

The beneficiaries of Pinnacle’s retirement plan earned benefits in the form of a single life annuity, or SLA. The SLA then makes monthly payments to the beneficiary upon retirement. The plan also offered a joint survivor annuity, or JSA, which makes payments to a surviving beneficiary, typically a spouse, after the death of the participant. The JSA must be actuarially equivalent to an SLA, discounted for the possibility that the spouse will outlive the participant up to a statutory maximum.

In calculating the present value of either annuity, the plan must account for future interest rates and the life expectancy of the participant using a reasonable mortality table. Underestimating the life expectancy of a participant by using an outdated mortality table, would likely result in the pension’s value being underestimated.

The suit alleges that Pinnacle used an actuarial table published in 1971 for calculating the JSA, which drew on life expectancy data from the 1960s, to estimate the life expectancy of plan participants. According to the suit, a 65 -year-old man on the 1971 table is estimated to live another 15.2 years, but a more updated table, published in 2014, says the same man should expect to live another 21.6 years. Plaintiffs Joseph Peck and Jerome Skrtich retired from Pinnacle in 2018 and 2021, respectively, and were enrolled in a JSA plan.

This would have the effect of reducing the “present value” of the JSA since it is projected into the future for fewer years and therefore also reduces the monthly payments paid out to the plaintiffs all else being equal. Peck’s pension was undervalued by $47,000, according to the suit, which translated to a reduction of $191.39 per month. Skrtich’s pension was undervalued by $17,000, which resulted in a monthly reduction of $62.91. The suit seeks class action status to include all beneficiaries affected.

 “By failing to pay JSA benefits in amounts that are actuarially equivalent to the single life annuities offered to participants under the plan, defendants cause retirees to lose part of their vested retirement benefits in violation of ERISA,” the plaintiffs argue.

When asked for comment, a representative of Pinnacle said, “we have received and are currently reviewing the complaint,” and declined to comment further.

The suit also alleges that Pinnacle used modern actuarial mortality tables in estimating their plan’s liabilities for the purpose of setting utility prices. Pinnacle passed these hypothetical pension costs onto their customers by requesting an increase in utility prices from the Arizona Corporation Commission, which was approved. Utility costs increased in Arizona by a combined $165.9 million to cover increased pension costs, but Pinnacle only applied the modern tables to calculating pension cost for the purpose of setting utility prices, and not for the pension pay-outs themselves, and therefore did not actually increase the pension pay-outs, which was ostensibly the justification for the cost increase in the first place.

Additionally, the plaintiffs allege that Pinnacle assumed a 4.3% female workforce when calculating the present value of a beneficiary’s pension, when the female workforce of Pinnacle is actually 25%. Since women tend to live longer than men, undercounting them in this calculation results in the present value being underestimated. Also, though men have made greater life expectancy gains than women since 1971 (closing, but not ending the gender gap) these gains have not been included in the calculation, since the mortality tables used by Pinnacle have not been updated.

The plaintiffs asked the court for compensatory damages and an injunction against future infractions.

The full complaint is available here.