Rockwell Automation Must Face ERISA Challenge

Allegations in the lawsuit, which has now cleared Rockwell’s dismissal motion, echo those filed in other lawsuits challenging the actuarial assumptions used by pension plan sponsors to value alternative forms of benefits other than the default.

A new decision issued by the U.S. District Court for the Eastern District of Wisconsin denies dismissal of a would-be class action complaint, rejecting Rockwell Automation’s allegation that a retired pension plan participant failed to adequately state a claim.

The plaintiff in the lawsuit alleged Rockwell has harmed participants, in violation of the Employee Retirement Income Security Act (ERISA), by incorporating outdated actuarial assumptions that resulted in certain alternative pension payments being less than the actuarial equivalent of the normal default pension benefit.

As is essentially standard procedure in such cases, Rockwell moved to have the complaint dismissed for failing to state a claim, but the District Court has now sided with participants and has agreed to at least allow the case to move forward to the discovery phase.

Background in case documents shows the Rockwell pension plan allows participants to choose from a variety of annuity types once they claim their pension benefit. One such optional annuity is a “certain and life” annuity, under which payments are made for the life of the participant or for at least a specified number of years. If the participant dies before receiving payments for the specified period, the remaining payments are made to the participant’s beneficiary.

According to case documents, when the lead plaintiff in this case, referred to as “Smith,” retired some years ago, he elected to receive his pension in the form of a 10-year certain-and-life annuity, with his son as the beneficiary.

Case documents show the Rockwell plan’s governing documents specify that, to calculate actuarial equivalence for the annuity that Smith elected to receive, the plan must use a specific mortality table, known as the 1971 Group Annuity Mortality (GAM) Table for Males. The governing documents further detail that the applicable discount interest rate is 7%.

According to the complaint, the 1971 GAM is nearly 50 years old and reflects life expectancies of retirees in 1970. In 1970, a 65-year-old had a life expectancy of 15.2 years, the plaintiffs suggest. However, in 2010, a 65-year-old had a life expectancy of 19.1 years, a 26% increase.

“Thus, in 2010, the average retiree receiving a single life annuity would have expected to receive more payments than a retiree in 1970,” the complaint states. “By using the 1971 GAM to calculate actuarial equivalence, the plan’s optional annuities assume that the annuitant will die sooner than average and thus receive fewer payments than is likely. This, in turn, causes the value of the optional annuity to be less than the actuarial equivalent of a single life annuity, in violation of ERISA.”

In its motion to dismiss, Rockwell contended that a plan pays actuarially equivalent benefits so long as it calculates actuarial equivalence using actuarial assumptions that were reasonable at the time they were written into the plan. “The conclusion that the defendants would like me to draw from these provisions is that Congress could not have intended to require that plans periodically review their actuarial assumptions to ensure that they are reasonable at the time benefit calculations are made,” U.S. District Judge Lynn Adelman wrote in his opinion. He decided that nothing in the provisions of law the company pointed to suggests that the term “actuarial equivalent” means “actuarial equivalent as of the date the plan adopted its actuarial assumptions.”

For example, Adelman pointed out that Section 401(a)(25) does not prohibit employers from amending a plan’s actuarial assumptions to bring them up to date. It places no constraint whatsoever on an employer’s discretion to amend the plan for any reason. “And it is easy to draft an amendment that incorporates updated actuarial assumptions but does not also grant the employer discretion to manipulate those assumptions,” he wrote.

Adelman suggested that “the plan could adopt a variable standard that is self-updating, such as one of the variable standards identified in Revenue Ruling 79-90.”

Adelman also noted that plans can minimize conflict between the actuarial-equivalence requirement and ERISA’s anti-cutback rule by adopting variable actuarial assumptions that self-adjust to reflect changes in mortality and interest rates. Under Revenue Ruling 81-12, “in the case of a variable standard, any variation in accordance with the plan standard is not subject to” the anti-cutback rule. He agreed with the defendants’ contention that nothing in ERISA requires plans to use a variable standard. However, he said the point is that a plan that is concerned about having to “continually increase benefits” has the option of adopting a variable standard. Once the variable standard is adopted, the plan will not have to continually increase benefits to comply with the anti-cutback rule—only those employees who accrued benefits under the old, fixed standard would potentially be entitled to increased benefits.

The defendants also contended that, to accept the plaintiff’s interpretation of “actuarial equivalent,” the court “would have to legislate a detailed set of rules … specifying when a plan must change the actuarial assumptions it used to determine its contractually promised annuity benefits, how a plan should decide which mortality tables and interest rates to use and for which plan participants.” But Adelman disagreed, saying ERISA already contains the relevant rule: Plans must ensure that any optional annuity forms are actuarially equivalent to a single life annuity.

“This means that plans must use the kind of actuarial assumptions that a reasonable actuary would use at the time of the benefit determination. A court does not have to specify further details to enable plans to comply with the rule. They may comply by periodically consulting with professional actuaries who will review the plan’s actuarial assumptions for reasonableness and recommend whether changes to mortality tables or interest rates are needed,” Adelman wrote.

In rejecting the motion to dismiss, he found that the Rockwell plan’s actuarial assumptions do not provide actuarial equivalence and that the complaint adequately alleges that the plan did not provide Smith with an actuarially equivalent annuity.

The full text of the ruling is available here.