In 1789, we elected George Washington as the first President of the United States. But life in this country was far from ideal. Science hadn’t yet discovered antibiotics or antiseptics, and the average life expectancy in the United States was about 36 years.1 In contrast, today in the United States, the average life expectancy more than doubles that; it’s around 76 years for men and 81 years for women.2
So imagine if an employer could lower the pension benefits it pays its employees by assuming people’s lifespans will be as short as they were back in 1789. That would be hard to justify.
Plaintiffs Richard Odom and William Drummond allege that their former employer took a similar approach. In their telling, Southern Company Services, Inc.; its pension plan; and the plan’s administrator used unrealistic assumptions about how long they and their spouses would live—as many as 70 years out of date.
It references ASOPs, actuarial equivalence, and more.
Um, how would they do this? That assumption would lower the EXPECTED COST of those benefits, but the benefits would eventually be realized, as today’s mortality tables reveal themselves. Unless they were going to pay $1/month for the rest of their lives.
Or, are they cheapening the Full Payout amount? If so, pensioners shouldn’t accept the offer. They might find a better offer from someone else.
Before I read the ruling, is it factual or do I need someone’s (your?) fact-check as a follow-up?
Plaintiffs assert that those unreasonable assumptions mean they get less in each monthly pension payment than they’re owed.
I still don’t get it. If it is a defined benefit plan, the benefit is defined. The Cost of Contributions to Cover the DB is not part of the benefit.
No, I’m not reading 67 pages. Some expert could summarize for the rest of us.
Only way the suit makes sense is if the Benefit is Designed as “Whatever we want to pay you.”
Or, “OK, your DB of $50K per year for the rest of your life is worth… (fudge some numbers, using high-mortality assumption) … $250K today. So, assuming you’ll live 20 years (different from the earlier mortality assumption), we’ll pay you $12.5K per year. OK? Deal?”
Disclaimer: not a pension actuary, but would like to learn something.
I skimmed the first few pages. The benefit is defined as a single life annuity commencing at age 65, but the plaintiff contends there were two issues. One, he is getting less money with a joint and survivor annuity than he is due. ERISA requires the joint and survivor be actuarially equivalent to the defined single life annuity but does not define actuarially equivalent. The plan says that’s part of the “defined” benefit, they can “define” what the actuarial equivalence is, even if it assumes higher-than-plausible mortality (which leads to lower joint and survivor annuity amounts payable), but the plaintiff says the actuarial equivalence needs to be reasonably reflective of reality.
Second issue, the plaintiff was charged for having pre-retirement survivor annuity coverage. (It’s my understanding that this is perfectly legal, but no plan I’ve ever worked on has charged for this.) I believe those charges can’t be higher than the actuarial cost of the coverage, but because of the high assumed mortality, the charged cost of that coverage was higher than it would have been under a definition of actuarial equivalence reasonably reflective of reality and reduced his benefit too much. The document says the reduction was 0.75% charge each year against the accrued benefit, which feels steep to me, but again, I’ve never worked on a plan that charges anything for the QPSA (Qualified Pre-retirement Survivor Annuity).