Plaintiffs in the latest example of retirement plan litigation claim a contracted pension actuary failed to accurately assess forward-looking pension liabilities, resulting in more than $100 million in alleged damages.
UPMC is a Pennsylvania non-profit corporation, organized and operated for charitable purposes and recognized by the Internal Revenue Service (IRS) as exempt from federal income taxation pursuant to Section 501(c)(3) of the Internal Revenue Code. UPMC operates health care facilities in and around Pittsburgh, Pennsylvania; the organization is also the parent and supporting organization for numerous other non-profit health care providers, each existing as a separate and distinct corporate entity,
Plaintiff UPMC Altoona is one such subsidiary of UPMC, court documents show. Until July 1, 2013, the Central Pennsylvania Health Services Corporation (CPHSC), also a non-profit Pennsylvania corporation, owned 100% of the membership interest in Altoona, which was then known as Altoona Regional Health System. Other than its membership interest in Altoona, CPHSC owned no other material assets or interests, according to plaintiffs.
On July 1, 2013, CPHSC merged into Altoona; UPMC acquired Altoona Regional Health System; which was immediately re-named “UPMC Altoona.” As part of the acquisition of Altoona, UPMC agreed to acquire all of Altoona’s outstanding assets and liabilities, including its pension and benefit plan debt. UPMC is currently the sole corporate member of Altoona.
The plaintiffs allege that, from 2002 through February 2015, defendant CBIZ Benefits & Insurance Services served as actuarial consultants for UPMC Altoona’s two largest pension benefit plans (an individual actuary and the CBIZ parent corporation are also named in the suit).
“In this capacity, defendants represented that they were experienced, qualified, and capable in the actuarial valuation of pension benefit plans,” the complaint suggests. “Each year, defendants prepared actuarial valuations of the plans’ benefits to allow Altoona to fund the plans in compliance with regulatory requirements; to certify the funded status of the plans in order to allow for the plans’ operation and administration; to file PBGC premiums; and to account for the plans in its financial statements in accordance with generally accepted accounting standards.”
CBIZ was paid substantial fees to perform this work, plaintiffs add, yet “during the course of this engagement, from at least July 1, 2008 through February 2015, defendants failed to adhere to actuarial standards of practice and consequently materially erred in valuing the obligations and liabilities of Altoona’s pension benefit plans for funding, compliance, and accounting purposes … Defendants’ multiple errors caused the Altoona Plans’ Projected Benefit Obligation (PBO) to be falsely stated on Altoona’s balance sheet at $240 million. In fact, Altoona’s PBO was then $373 million: Defendants had understated the liability by approximately $132.5 million.”
NEXT: Details from the complaint
The complaint also points out that “UPMC was induced to purchase Altoona in reliance upon the actuarial valuations prepared by defendants for the plan year ending June 30, 2012, which understated Altoona’s pension expense for that year—and consequently vastly overstated Altoona’s profitability for the same period as measured by its Earnings Before Interest Depreciation and Amortization—by at least $18 million.”
Thus, according to the complaint, defendants’ failure to value the Altoona Plans in accordance with actuarial standards of practice materially changed Altoona’s overall financial picture such that, had the true state of affairs been known, UPMC likely would not have acquired Altoona, or in the very least, would have negotiated and structured a different deal for Altoona. “Now, UPMC owns an entity, Altoona, whose obligations are substantially greater than UPMC had bargained for,” plaintiffs suggest.
Beyond these claims, plaintiffs argue CBIZ is responsible for keeping Altoona from freezing its pension plan at a prudent point: “Under ERISA and the Internal Revenue Code, when the plan’s funded ratio … drops below a certain level, the plan must be completely frozen such that no new participants may join; no new benefits may be earned; and payment of certain other benefits is prohibited. Here, for example, it is likely that the two Altoona Plans, Bargaining and Non-Bargaining, should have been fully frozen by October 1, 2011 and October 1, 2012 respectively, if correct actuarial valuations had been used instead of CBIZ’s wholly inaccurate ones.”
Important to the complaint, plaintiffs assert that the defendants knew their actuarial services would serve as key components of UPMC’s decisionmaking with regard to the Altoona acquisition as well as the subsequent management of the pensions in question. Also important, plaintiffs claim they had no way of discovering the problems “because the errors were the result of erroneous assumptions and methodologies undisclosed in the GAAP and Funding Reports prepared by defendants.”
“In fact, Altoona and UPMC only learned of the errors when another CBIZ actuary … reviewed the funding calculation for the plans after [defendant Jon Ketzner] retired. Specifically, sometime in November 2014 defendant Ketzner informed UPMC Treasury Department employee Erin Klinger that the estimated contribution required to be made to the plans in order to eliminate PBGC variable rate premiums, due in March 2015, was $6.5 million. Around February 2015, Klinger called defendant CBIZ-B&I to confirm the Plans’ PBGC funding contribution. By that time, Ketzner had retired. On March 6, 2015, Alvin Winters notified Klinger that the plans’ actual contribution necessary to eliminate PBGC variable rate premiums for the year was $66.6 million, $60 million more than Ketzner had estimated. Shortly thereafter, on March 11, 2015, Winters disclosed to UPMC the errors he had discovered in Ketzner’s assumptions and methodology.”
CBIZ general counsel Mike Gleespen shared the following response with PLANSPONSOR: “We have defenses that will be presented at the appropriate times, and we plan to vigorously contest the litigation. We can’t comment on the allegations in the complaint or on facts of the matter because we don’t want to prejudice the proceedings against UPMC and UPMC Altoona.”
The full text of the complaint is available here.
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