IBM pension plan faces challenge of outdated mortality data

Plaintiffs filed a new Employee Retirement Income Security Act lawsuit in the U.S. District Court for the Southern District of New York, naming IBM and various related entities, including the technology company, as defendants.

The case echoes other recent ERISA lawsuits that relate to conversion calculations used to determine the value of certain types of annuity benefits to be paid by pension plans. Plaintiffs in these proposed class actions advance a subtle but potentially financially significant argument that seeks to remedy alleged failures of pension plans to pay joint and survivor annuity benefits in amounts “actuarially equivalent” to a life annuity benefit. unique. Such actuarial equivalence is required by ERISA.

Plaintiffs in such cases suggest that by not offering JSAs that are actuarially equivalent to the individual life annuities that participants earn, defendants cause retirees to lose a portion of their pension benefits acquired in violation of ERISA. These plaintiffs are seeking various remedies in federal courts, including monetary damages and mandatory structural reforms to their pension plans.

Outdated mortality assumptions and inflated interest rates play into the calculation of “actuarial equivalence,” according to those lawsuits.

To calculate the payout amounts of a JSA—a type of retirement annuity that will pass to the member’s spouse or other beneficiary upon death—certain actuarial assumptions are applied to determine a “conversion factor” which may in turn determine the “present value” of future payments. These assumptions are based on a mortality table (used to predict how long the participant and beneficiary will live) and the current interest rate (used to discount expected payments based on expected future earnings on the principle).

Plan members in these cases say their employers knowingly use outdated mortality tables and inflated interest rate assumptions that undervalue the JSA benefit relative to the ALC. They say this is because death rates have generally improved over time with advances in medicine and better community lifestyles. Thus, people who retired recently are expected to live longer than those who retired in previous generations. Similarly, older life tables predict that people near (and after) retirement age will die at a faster rate than current life tables.

Therefore, in these cases, an employer using an older mortality table to calculate a conversion factor decreases the present value of a JSA and, interest rates being equal, the monthly payment retirees receive. The interest rate also affects the calculation, so using lower interest rates (mortality rates being equal) decreases the present value of benefits in forms other than an SLA.

In the new case, the plaintiffs allege that the IBM plan violates ERISA’s actuarial equivalence rules for individuals who began participating in IBM’s personal retirement plan before it was amended effective July 1. July 1999. For these individuals, the complaint alleges, when the scheme converts from an SLA to a JSA, it uses a mortality table that is over 40 years out of date, “despite massive increases in life expectancy at over the decades that followed.

“As a result, these participants and their beneficiaries receive significantly less than the actuarial equivalent of their single life annuity, which is directly contrary to ERISA requirements,” the complaint states. “The defendants appear to have acknowledged that these actuarial assumptions were not acceptable. In 1999, IBM restructured the plan into a cash balance plan for new hires to reduce its retirement obligations. When IBM changed the plan [to] To implement this new structure, it modified the plan’s definition of actuarial equivalence to use updated actuarial assumptions. But for people who had been employed by IBM prior to this amendment, defendants continue to employ punitive, unreasonable, and seriously outdated assumptions, resulting in the class receiving less than its full pension.

The full text of the compliance is available here. IBM has not yet responded to a request for comment on the lawsuit.

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