Court Dismisses ERISA Actuarial Equivalence Lawsuit

The ruling, issued in favor of Partners Healthcare System, offers a substantial legal analysis of ERISA’s requirements as they pertain to the actuarial equivalence of different types of defined benefit pension annuities.

The U.S. District Court for the District of Massachusetts has issued a ruling in a complex Employee Retirement Income Security Act lawsuit filed against Partners Healthcare System and various committees tasked with operating its defined benefit pension plan.

The complaint addressed by the ruling challenges the use of both allegedly outdated mortality tables and artificially high interest rate assumptions in the conversion of annuity types under Partners’ pension plan.

The new ruling comes in response to Partners’ motion to dismiss the amended complaint under the Federal Rule of Civil Procedure 12(b)(1), for lack of standing, and the Federal Rule of Civil Procedure 12(b)(6), for failure to state a claim. Pursuant to another Federal Rule of Civil Procedure, 12(d), the Court actually converted the motion to dismiss for failure to state a claim to a motion for summary judgment, which the new ruling addresses.

In sum, the motion to dismiss for lack of standing was denied, but the motion to dismiss for failure to state a claim, as converted to a motion for summary judgment, was granted.

The new ruling comes after a complex procedural history in the lawsuit. Back in January 2020, the Court issued a mixed ruling on the defense’s initial motion to dismiss. Case documents show the lead plaintiff initially filed suit on behalf of himself and all others similarly situated, alleging the way in which Partners calculates the value of his type of pension annuity benefit violates ERISA. Specifically, the lead plaintiff alleges that Partners uses outdated actuarial information dating from 1951 for the calculation of certain pension benefit payments, which artificially reduces the value of his annuity and thus violates the protections of ERISA.

A second ruling was handed down in August 2020, siding with the plaintiffs in the case and rejecting the defense’s motions, based on the Court’s determination that there remained “no clear answer,” at least at that stage of the proceeding, as to what is necessary for the two types of annuity benefits being considered in the case to be “actuarial equivalents,” as is required by ERISA. That ruling noted how ERISA does not explicitly define the term “actuarial equivalent,” and how the various federal courts that have considered the question have yet to agree on a definition. For that reason and others, the Court said, it would have been inappropriate to reject the plaintiffs’ claims ahead of discovery and further legal consideration.

That background led to the new ruling, which sides ultimately with the defendants, but not without deciding some legal points in favor of the plaintiffs. For example, regarding the motion to dismiss for lack of standing, the court draws the following conclusion:

“Plaintiff’s factual allegations—including the allegation that the use of outdated mortality tables and an above-market interest rate has reduced the present value of his retirement benefits—must be accepted as true. The complaint has sufficiently alleged that plaintiff’s retirement benefits were reduced because of the outdated mortality assumptions and interest rates used by Partners. As a result, the complaint sufficiently pleads an injury in fact for purposes of the standing analysis. … At this stage in the proceedings, it is not for this Court to determine which calculation is appropriate. Instead, the question is whether plaintiff has sufficiently established that his injuries would likely be redressed by a favorable decision. And the complaint sufficiently alleges that a favorable decision would result in an increase in his benefits. Accordingly, the motion to dismiss for lack of standing will be denied.”

From here, the decision goes into a substantial legal analysis of ERISA’s requirements as they pertain to the actuarial equivalence of different types of defined benefit pension annuities, including a lengthy discussion regarding the extent to which ERISA requires the various actuarial assumptions that underpin annuity conversions to be “reasonable.” For example, the ruling notes that one potentially relevant precedent holds that an analysis of actuarial equivalence must be “determined on the basis of actuarial assumptions with respect to mortality and interest which are reasonable in the aggregate.” But that case involved a lump-sum distributions, for which ERISA does explicitly require the use of “reasonable actuarial inputs.” ERIS simply does not expressly do so for annuities, the court explains.

While it acknowledges that other district courts have reached different conclusions, the ruling here ultimately concludes that “it does not appear that actuarial equivalence, to the extent it is a term of art in the field, necessarily requires or implies ‘reasonable’ actuarial assumptions.”

“Neither of plaintiff’s experts so testified,” the ruling states. “Plaintiff’s experts noted that they consider the reasonableness and currentness of actuarial assumptions when selecting rates for a plan. However, the selection of plan terms is not what is at issue; rather, it is the calculation of individual benefits. And when asked how to calculate an actuarially equivalent benefit, both of plaintiff’s experts unambiguously testified that if a plan defines actuarial equivalence, then the actuary should use the plan’s actuarial assumptions to calculate a participant’s benefit.”

The ruling continues: “Under the circumstances, the Court cannot conclude that the calculation of actuarial equivalence under § 1054(c)(3) of ERISA requires the use of ‘reasonable’ assumptions, particularly when the plan itself specifically requires the use of particular actuarial assumptions. It therefore follows that the calculation of plaintiff’s retirement benefit here did not violate ERISA. It should be noted that the fact that § 1054(c)(3) does not mandate a reasonableness standard does not mean that plan sponsors have unfettered discretion in calculating plan benefits; the assumptions used to determine actuarially equivalent benefits must be expressly stated in the plan documents. Here, those assumptions were (and are) set forth in the plan, not hidden somehow from the participants.”

The full text of the ruling is available here.