Actuarial equivalence appellate decision leaves outlook murky 

The lawsuit is one in a wave of similar lawsuits challenging the mortality table and interest rate used to convert participants’ accrued benefits to joint and survivor annuities. Plaintiffs in these cases allege the assumptions are outdated and that participants’ annuity payments are smaller than they would be if more current assumptions were used. In Drummond, the plaintiffs also claim the plan used unreasonable assumptions to calculate the charge for the qualified preretirement survivor annuity (QPSA) — the benefit that is paid if the participant dies before retiring — resulting in an excessive reduction in the accrued benefit. (Charging for QPSA coverage is permissible, though many plans no longer do so.) The company argued that nothing in ERISA requires the use of reasonable assumptions for these purposes, and the district court agreed with the company and dismissed the case. The plaintiffs appealed. 

The three-judge appellate panel found that although ERISA lacks an explicit reasonableness requirement, the “plain meaning of the words in ‘actuarial equivalence’ suggests reasonable, realistic actuarial assumptions.” The decision cited professional standards requiring actuaries to use reasonable assumptions and produce reasonable results, as well as literature suggesting that in many circumstances actuaries must ensure that previously selected assumptions remain reasonable. The ruling extends this concept by suggesting that actuarial assumptions written into plan documents should also be reviewed to ensure they remain reasonable over time. The ruling is careful to note that actuarial equivalence does not, however, require the use of any particular set of assumptions; rather, plans may use “any of a range of reasonable mortality and interest-rate assumptions.”

The outlook for actuarial equivalence lawsuits remains murky. Though Drummond now heads back to the district court, it may be unlikely to make it to trial, and the substantive issue — whether the plan’s actuarial equivalence assumptions are unreasonable — remains undecided. To date, the majority of actuarial equivalence cases have settled; a few have been dismissed; none have yet gone to trial. The rulings that have been issued have been inconsistent. In April, two separate district courts found that ERISA does not contain a reasonableness requirement (Berkeley v. Intel and Landel v. Olin Corp.). However, just a month before that, the 6th Circuit ruled in favor of the plaintiffs on the reasonableness issue in two other cases (Reichert, et al., v. Kellogg Co. and Watt, et al., v. FedEx Corp.).