Court Permits Healthcare System Cash Balance Lawsuit to Proceed

The parties in Belknap v. Partners Healthcare System have been given an opportunity to submit supplemental briefing as to the meaning of “actuarial equivalent” under the relevant statutes.

The U.S. District Court for the District of Massachusetts has issued a mixed ruling on the defense’s motion to dismiss the lawsuit Belknap v. Partners Healthcare System.

Case documents show the lead plaintiff filed suit on behalf of himself and all others similarly situated, alleging the way in which Partners Healthcare System calculates the value of his type of pension annuity benefit violates the Employee Retirement Income Security Act (ERISA).

Specifically, he alleges that Partners uses outdated actuarial information dating from 1951 for the calculation of certain pension benefit payments, which artificially reduces the value of his annuity and thus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. The plaintiff suggests the use of such old mortality data deflates the value of his annuity benefit based on the fact that people who recently retired are expected to live longer than people who retired in previous generations. As a result, using an older mortality table to calculate a conversion factor between different annuity types allegedly decreases the present value of the non-default annuity.

This argument is echoed in numerous cases that have been filed in the past few years, naming such defendants as MetLife, Pepsi and American Airlines. For its part, case documents show, Partners moved to dismiss the complaint wholesale under Federal Rule of Civil Procedure 12(b)(6), for failure to state a claim.

Technically, the motion to dismiss is granted for all counts to the extent that they are based on an alleged violation of “29 U.S.C. 1053(a)” and denied—without prejudice—for all counts to the extent that they are based on alleged violations of “29 U.S.C. §§ 1054(c)(3) or 1055.” The court says the parties have been given an opportunity to submit supplemental briefing as to the meaning of “actuarial equivalent” under the statute, “or otherwise to propose a framework for resolution of the issue.”

A Term of Art?

As the District Court ruling explains, ERISA and other federal statues require that different types of qualified pension benefits offered to a single plan’s population must be “actuarially equivalent.” This is to say that if a participant chooses to select one type of annuity benefit versus another offered in the plan—in this case a joint and survivor annuity (JSA) versus a single life annuity (SLA)—the present theoretical value of each benefit choice must be equal.

“Actuarial equivalence may be a term of art, but the statute does not define it, nor is its meaning clear on this record,” the decision states. “And under at least one plausible definition of actuarial equivalence, the way in which [plaintiff’s] retirement benefits are valued could violate that requirement. Accordingly, and for the reasons set forth below, the motion will be denied without prejudice, at least to the extent the claims are based on alleged violations of 29 U.S.C. §§ 1054(c)(3) and 1055.”

The ruling goes on to observe that, according to the complaint, Partners uses “typical and up-to-date actuarial assumptions” when calculating the value of all benefit forms during the preparation of its mandatory financial statements. Specifically, the complaint alleges that Partners uses an interest rate that accurately reflects market conditions and an updated mortality table from 2000 that is projected forward to 2014. On the other hand, according to the complaint, Partners uses the old 1950s-era inputs to calculate actuarial equivalence for non-SLAs when paying out benefits, which they say is a clear violation of the actuarial equivalence standard.

When converting the value of annuity benefits, the complaint alleges, Partners uses an inflated interest rate of 7.5% and a “1951 Group Annuity Mortality Table projected to the 1960 Mortality Table, set back two years for participants, and set back three years for beneficiaries.”

“According to the complaint, using the 1951 Adjusted Mortality Table is unreasonable because it is severely outdated,” the decision states. “The complaint alleges that because of this unreasonable input, participants who receive non-SLAs calculated using the 1951 Adjusted Mortality Table do not receive benefits that are actuarially equivalent to SLAs.”

The full text of the Massachusetts District Court ruling is available here.