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Broad Reach for Lawsuits Involving Mortality Tables

Practice Management

Lawsuits have been filed concerning several large corporate pension plans. While those suits involve specific plans, a recent blog entry argues that they have broader implications.

In “The Defined Benefit (DB) Lawsuits: Why There May Be Widespread Implications,” a recent entry in Cammack Retirement’s “Insights” blog, Arthur Scalise writes that these suits — in which the sponsors of the plans serving American Airlines Inc., Metropolitan Life Insurance Co., PepsiCo Inc. and U.S. Bancorp are accused of using outdated mortality tables — raise issues that “are not unique to large pension plans, nor to corporate plan sponsors.”

Scalise writes that while the IRS regulates the annually updated mortality tables used to measure the obligation to fund a pension plan and the minimum lump sum value of a retiree’s benefits, the same is not true concerning conversion of a pension benefit into certain other actuarial equivalent forms of payments, nor calculation of the actuarial equivalent of early retirement benefits. “Currently, there are no similar regulations mandating the use of specific mortality tables” in such circumstances, he says.

Some plans provide “tabular factors” for converting to optional forms of payments or to begin making them early, writes Scalise, but the plan documents of many others include definitions of the mortality tables and the interest rates they use for such conversions — mortality tables about which there is little IRS guidance regarding if, or when, they should be updated.

A common feature of qualified corporate DB plans is for optional forms of payments to be actuarially equivalent but converted through the application of mortality tables that are only subject to an IRS requirement that they be reasonable. Scalise says this can result in some payment forms yielding different amounts than others for retirees. “The same issue can arise for plans that offer actuarially equivalent early retirement benefits,” he adds.

“While plan sponsors have not done anything illegal or inappropriate according to IRS regulations as they are today, these lawsuits may open pension plans to scrutiny,” writes Scalise. He suggests review of the assumptions a plan uses in measuring actuarially equivalent benefits, and advocates a careful understanding of the issues involved and what these rulings could mean for other plans.