Pension Lump Sums Must Account for COLAs

The U.S. District Court for the Northern District of Oklahoma noted that the Employee Retirement Income Security Act (ERISA) defines a defined benefit plan participant’s accrued benefit as “the individual’s accrued benefit determined under the plan and, …expressed in the form of an annual benefit commencing at normal retirement age.” U.S. District Court Judge Gregory K. Frizzell determined that for the plan in the present case, any annuitant at normal retirement age will receive a set payment that will increase according to a COLA throughout the annuitant’s lifetime, and that is the accrued benefit.  

Frizzell relied on the 7th Circuit’s opinion in Williams v. Rohm and Haas Pension Plan (see “High Court Lets Stand Decision on COLAs in Lump-sum Calculations”), in which the court said: “If a defined benefit pension plan entitles an annuitant to a COLA, it must also provide the COLA’s actuarial equivalent to a participant who chooses instead to receive his pension in the form of a one-time lump sum distribution.”  

A class of participants of the Williams Companies Inc. pension plan sued the company for providing COLAs to annuitants but not to those who took a lump sum payment in lieu of their annuity. Frizzell ruled the company is liable to the class, but the amount will be determined at a separate time.