Verizon Escapes $1.6B Pension Liability

November 5, 2009 (PLANSPONSOR.com) - A federal judge in Illinois who ruled last year that Verizon was bound by the language in its defined benefit plan document even if it included a drafting error has now decided that Verizon can simply correct the error that could have cost $1.67 billion.

The decision by U.S. Magistrate Morton Denlow of the U.S. District Court for the Northern District of Illinois was the latest development in a long-running legal battle dating back to 2005 over whether the communications company should be required to honor the mistakenly drafted document.

The document inadvertently called for the company to boost opening balances in a new pension plan by twice multiplying the cashout value of each employee's stake in the old plan by a variable "transition factor" that was based on age and years of service. The official who drafted the document only intended a single multiplication.

In a 105-page opinion, Denlow said he was persuaded that the drafting problem was an honest error by a company official who readily admitted it had been made and that Verizon's actions in administering the plan otherwise backed up the notion that the single multiplication reflected the employer's intentions.

"Plaintiff has not shown that Defendants acted deceitfully, fraudulently, unconscionably or in bad faith," the court wrote. "Defendants made a mistake drafting the Plan, a mistake which was undoubtedly negligent. However, Defendants continued to administer the Plan consistently throughout. Defendants' actions were in concert with both the Board authorization and the communications to the Plan participants regarding the implementation of the Cash Balance Plan."

If the court ruled that Verizon had to implement the mistaken double multiplication, Denlow said, members of the class bringing the suit would have enjoyed a $1.67 billion windfall including $400,000 to lead plaintiff Cynthia N. Young.   More than 5,780 participants would receive unanticipated increases in their opening pension balances of $100,000 or more, the court said.

"On one hand, Congress implemented ERISA [Employee Retirement Income Security Act] to ensure that employees' benefits were protected," Denlow wrote. "On the other hand, Congress did not desire to create a system that would result in high administrative and litigation costs that could potentially discourage employers from offering plans. If errors in plan drafting are to be strictly enforced so as to create a windfall to participants at the unanticipated expense of the plan, it could presumably act as a deterrent to employers from establishing such plans."

Denlow ruled in 2008 that the benefits committee abused its discretion by opting to disregard the mistaken language and deny Young's request that her benefits be calculated by using the transition factor twice (see Verizon Hit for Cash Balance Conversion Error ).

The latest Denlow ruling is available here .

Fred Schneyer
editors@plansponsor.com