A new Employee Retirement Income Security Act (ERISA) lawsuit filed in the U.S. District Court for the Northern District of Georgia suggests the United Parcel Service of America (UPS) committed multiple fiduciary breaches while calculating the value of certain pension benefits.
The plaintiffs, calling for class action status, say their suit seeks to remedy failures to pay joint and survivor annuity (JSA) benefits in amounts that are “actuarially equivalent” to a single life annuity (SLA) benefit to pension plan participants and their beneficiaries. Such actuarial equivalence is required by ERISA.
Allegations in the lawsuit closely mirror those in numerous cases that have been filed in the past few years, naming such well-known defendants as MetLife, Pepsi and American Airlines. As in this new lawsuit, the plaintiffs in such cases suggest that, by not offering JSAs that are actuarially equivalent to the single life annuities that participants earn, the defendants are causing retirees to lose part of their vested retirement benefits in violation of ERISA.
The plaintiffs in the new challenge say UPS pension participants earn retirement benefits in the form of an SLA as the default. Participants in the plans may choose, however, to receive their benefits in forms other than an SLA, including a JSA, which provides an annuity during the participant’s life and then a percentage of that amount to the participant’s beneficiary after the participant’s death. In this case, UPS reportedly makes JSAs available in 50%, 75%, or 100% amounts.
“To calculate the amounts of a JSA, actuarial assumptions are applied to determine the present value of the future payments,” the complaint states. “These assumptions are based on a mortality table—to predict how long the participant and beneficiary will live—and interest rates to discount the expected payments. The mortality table and interest rate together are used to calculate a ‘conversion factor’ which determines the benefit amount that would be equivalent to the SLA the participant accrued.”
The complaint stresses that, under ERISA, the “present values” of a JSA and the SLA must be equal for them to be “actuarially equivalent.”
“Mortality rates have generally improved over time with advances in medicine and better collective lifestyle habits,” the complaint continues. “People who retired recently are expected to live longer than those who retired in previous generations. Older morality tables predict that people near (and after) retirement age will die at a faster rate than current mortality tables. As a result, using an older mortality table to calculate a conversion factor decreases the present value of a JSA and—interest rates being equal—the monthly payment retirees receive. The interest rate also affects the calculation. Using lower interest rates—mortality rates being equal—decreases the present value of benefits in forms other than an SLA.”
According to the lawsuit, the UPS defendants calculate the JSA conversion factor (and thus the value of the JSA offered to participants when they retire) using mortality assumptions from the 1980s. The suit further claims the company uses outdated interest rate assumptions that further dampen the present value of the JSA benefit.
“By using outdated mortality rates, defendants depress the present value of the benefits received as a JSA, resulting in monthly payments that are materially lower than they would be if defendants used reasonable, up-to-date actuarial assumptions,” the lawsuit states. “Defendants use outdated mortality assumptions to pay benefits even though they use current, updated assumptions in their audited financial statements to calculate the benefits they expect to pay retirees.”
UPS provided the following statement in response to the lawsuit: “UPS offers competitive compensation packages and uses factors that are common to many similar benefit plans across the country to calculate those benefits. These factors are reasonable and comply with all applicable laws. We will vigorously defend ourselves, and continue to provide industry-leading compensation packages for our employees.”