Lump-sum pension distributions are frequently the subject of litigation and the 7th U.S. Circuit Court of Appeals addressed such a case in Dennison v. MONY Life Retirement Income Security Plan for Employees, 2013 U.S.App.LEXIS 4651 (7th Cir. March 6, 2013).
The named plaintiff in a class action, John Dennison, was employed by MONY (Mutual of New York Insurance Co., now a subsidiary of AXA) until 1996. While employed by MONY, Dennison participated in two retirement plans – a tax-qualified, defined benefit plan and an unfunded “top-hat” plan providing excess benefits above the maximum amount of qualified benefits permitted by the Internal Revenue Code. Under both plans, Dennison was eligible to start receiving benefits at age 55, which he reached in 2009, either as a monthly annuity or in a lump sum, which was represented to be the actuarial equivalent of the annuity.
Determination of actuarial equivalency requires both an estimate of life expectancy as well as a determination of an appropriate discount rate in order to calculate the present value of the projected annuity payments.
The dispute in Dennison related to the discount rate selected by MONY – 7.5 percent. Because the higher the discount rate percentage used, the lower the present value, the plaintiffs challenged the rate selected by their employer. The plaintiffs complained that MONY should have used a rate computed by the Pension Benefit Guaranty Corp., which would have been 3 percent and, thus, would produce a much higher present value.
Indeed, the qualified plan explicitly stated at the time Dennison left MONY that the discount rate would be the Pension Benefit Guaranty rate as of 120 days before the date the lump sum payment was due, which was 3 percent. The excess plan did not specify a rate. However, the Pension Protection Act of 2006 authorized plan amendments that could permissibly raise the discount rate. The plan here permitted amendments, however, the plan provided “that no amendment shall … reduce the accrued benefit of any participant.”
The court interpreted the term “accrued benefit” to mean the annuity and not the lump sum, though. Thus, the court found that “[n]othing in the plan forbids retroactively amending the discount rate used to calculate the lump sum benefit if the participant chooses the lump sum in preference to the annuity.” Hence, the court determined that MONY was lawfully permitted to use the higher discount rate for the qualified plan.
Turning to the excess plan, the court noted that the plan document was very brief and the proper interpretation was unclear. But the court found the “clincher” in interpreting that plan was the plan administrator’s consistent practice of utilizing the 7.5 percent figure in calculating participants’ lump sum benefit distributions.
The court cited treatises, the Restatement of Contracts and precedents to apply to Employee Retirement Income Securities Act plans a principle of contract interpretation providing that when “consistent performance of parties to a contract accords with one of two alternative interpretations of the contract, that’s strong evidence for that interpretation.”
The court also offered policy justifications supporting its interpretation. It noted that if the recipient of a lump sum could invest the distribution at a rate higher than the plan’s discount rate, it could result in a windfall. Hence, the court rationalized that “MONY minimizes its exposure by fixing a high discount rate, which both reduces the size of its lump sum outlays and encourages plan participants to choose the annuity over the lump sum option, since, the smaller the lump sum relative to the annuity, the more attractive the annuity is.” Although the opinion could have concluded at that point, the court concluded by addressing the plaintiffs’ objection that they were denied discovery sought to investigate MONY’s conflict of interest.
The plaintiffs argued it was suspicious that the benefit plan appeals committee upheld a claim denial under grounds that differed from the initial determination. In addition, the plaintiffs cited MONY’s financial difficulties and its need to add additional funding to the tax-qualified plan and that the excess plan’s benefits were altogether payable out of corporate general assets. However, the court pointed out that the value of the claim to the class would be approximately $10 million, while AXA, MONY’s parent corporation, manages $450 billion in assets and shows $45 billion in equity in its SEC filings.
Thus, the financial motivation to deny a meritorious claim was diminished in the court’s eyes. Consequently, the court found it unnecessary to subject the benefit claims committee to extensive discovery “on a thinly based suspicion that their decision was tainted by a conflict of interest.” The law regarding discovery in the 7th Circuit was established in Semien v. Life Ins. Co. of North America, 436 F.3d 805, 815 (7th Cir. 2006), where the court held “that discovery in a case challenging the benefits determination of plan administrators is permissible only in ‘exceptional’ circumstances – circumstances in which the claimant can ‘identify a specific conflict of interest or instance of misconduct’ and ‘make a prima facie showing that there is good cause to believe limited discovery will reveal a procedural defect.'”
However, the court acknowledged that Metropolitan Life Ins. Co. v. Glenn, 554 U.S. 105 (2008), which recognized ERISA plan administrators’ conflicts of interest but did not address discovery, questions the continued vitality of Semien and suggests “a softening, but not a rejection, of the standard announced in Semien.” However, the court refused to go further to establish the contours of permissible discovery in ERISA litigation, leaving it to future decisions to address the issue.
I represented the plaintiff in the Semien case cited in the court’s ruling and in this article.