PepsiCo Defeats Pension Anti-Cutback ERISA Challenge

While it rejects one of the defense’s arguments for why its pension plan operated within the bounds of ERISA, in the end, the court ruled plaintiffs’ fiduciary breach claims fail as a matter of law.

The U.S. District Court for the Southern District of New York has ruled in favor of PepsiCo’s motion to dismiss an Employee Retirement Income Security Act (ERISA) lawsuit targeting the global beverage company.

Plaintiffs filed the lawsuit in December 2018 as one of a handful of very similarly structured complaints that also targeted MetLife and American Airlines. The lawsuits named as defendants the sizable companies and their various benefits committees or boards. In the case of the Pepsi, apart from the company, it names the PepsiCo Administration Committee.

The lawsuits alleged the companies failed to pay promised benefits under pension plans 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 caused retirees to lose part of their vested retirement benefits, the complaints alleged.

Ruling in the PepsiCo case, the New York District Court notes that, if a pension plan participant chooses to receive a survivor annuity calling for potential payments to the participant’s spouse, the participant naturally will get less money each month than if he or she chose to receive a single life annuity, or “SLA.”

“This makes sense,” the decision states. “A participant can choose to set money aside for his or her spouse after the participant dies, but doing so leaves less for the participant while he or she is still alive. Plan administrators must therefore calculate how much to pay each month to a participant who chooses to receive a [joint annuity]. ERISA requires that such calculations yield an annuity that is the actuarial equivalent of the participant’s SLA. In plain English, all the options in the alphabet soup of benefits from which a plan participant may choose must, at the end of the day, be worth the same as the participant’s SLA.”

The ruling points out that plaintiffs claim defendants do not follow the allegedly standard method of calculating conversion factors. Instead, plaintiffs say defendants “baldly” set a fixed conversion factor for each form of alternative benefit, and then apply those conversion factors to all participants alike—no matter the prevailing interest rate of the day, and no matter the participant’s life expectancy.

“Plaintiffs allege these fixed conversion factors yield [joint annuities] with lower present values than the SLAs that were available to plaintiffs at early retirement,” the decision states. “Thus, plan participants who retire early and choose a [joint annuity] allegedly end up worse off than if defendants calculated conversion factors in the purportedly standard fashion, using reasonable market interest rates and mortality tables.”

Against these allegations, the decision recounts, defendants first contended the plaintiffs’ claims fail as a matter of law because they do not arise under ERISA, but rather arise under federal regulations from which no private right of action derives. The Court says flatly the defendants are wrong on this matter.

“The complaint plainly pleads claims under ERISA, not regulations promulgated thereunder,” the decision states. “As plaintiffs’ opposition brief explains, the complaint’s citations to regulations interpreting ERISA do not mean plaintiffs rely on those regulations, rather than ERISA, as the legal basis for their causes of action. To the contrary, the complaint explicitly accuses defendants of violating ERISA in various ways.”

On the other hand, the Court agrees with the defense argument that the plaintiffs have failed to plausibly allege a violation of ERISA’s anti-forfeiture provision, because the provision applies only to “normal retirement benefits upon the attainment of normal retirement age.”

“Nonforfeitability attaches only after the employee attains normal retirement age,” the decision states. “The anti-forfeiture provision thus gives a plaintiff no vested right to receive benefits until he reaches normal retirement age. No plaintiff allegedly reached the plan’s normal retirement age. Accordingly, plaintiffs do not adequately plead that the anti-forfeiture provision applies.”

The full text of the ruling is available here