Court OKs Northern Trust DB Plan Change

In a case involving an amendment to the defined benefit (DB) plan benefit formula for Northern Trust’s DB plan, a federal appellate court agreed with a lower court decision that the change does not violate the Employee Retirement Income Security Act’s (ERISA) anti-cutback rule or the Age Discrimination in Employment Act (ADEA).

According to the opinion from the 7th U.S. Circuit Court of Appeals, prior to 2012, Northern Trust had a DB plan under which retirement income depended on years worked, times an average of each employee’s five highest-earning consecutive years, times a constant. As an example, the court noted that 30 years worked, times an average high-five salary of $50,000, times 0.018, produces a pension of $27,000.

In 2012, Northern Trust amended the plan benefit formula so that it multiplies the years worked and the high average compensation not by a constant but by a formula that depends on the number of years worked after 2012. Recognizing that shifting everyone to the new formula would affect the expectations of workers who had relied on the prior formula, Northern Trust provided people hired before 2002 a transitional benefit, treating them as if they were still under the prior formula except that it would deem their salaries as increasing at 1.5% per year, without regard to the actual rate of change in their compensation.

The plaintiff alleges that the 2012 amendment reduced his “accrued benefit” because he expected his salary to continue increasing at more than 5% a year, as it had done since he was hired in 1998.

The appellate court pointed out that the plaintiff concedes he would not have a complaint if, instead of amending the plan in March 2012, Northern Trust had terminated the plan, calculated the plaintiff’s accrued benefit, and deposited that sum in a new plan with additions to come under the new formula. The 7th Circuit found that what actually happened is more favorable to him—he gets the vested benefit as of March 2012 plus an increase in the (imputed) average compensation of 1.5% a year for pre-2012 work for as long as he continues working.

The court said the expectation of future salary increases is not an “accrued benefit” and the only benefit that had “accrued” at the time of the DB plan formula change was the sum due for work already performed. The court pointed out that if the former formula had remained, but Northern Trust had decided that an employee’s salary could increase at a rate no more than 1.5% a year, that would have had the same effect on the formula as the amendment. But a reduction in the rate of salary increases could not violate ERISA, which does not require employers to increase anyone’s salary. “Curtailing the rate at which salaries change would not affect anyone’s ‘accrued benefit,” the court wrote. “Since that is so, the actual amendment also must be valid.”

The plaintiff also alleges that the plan’s administrator violated ERISA because it did not furnish all participants with a writing that described the 2012 amendment “in a manner calculated to be understood by the average plan participant”. The 7th Circuit noted that Northern Trust provided its staff with an online tool that showed each worker exactly what would happen to that worker’s pension, under a number of different assumptions about future wages and retirement dates, and under both the pre-2012 formula and the amended formula. “A precise participant-specific summation is hard to beat for clarity and complies with ERISA,” the court said.

Benefit formulas under the ADEA

The plaintiff in the case contends that the fact that the high-five-average compensation feature of the prior benefit formula was most valuable to older workers approaching their highest-earning years means that the 2012 amendment produces a disparate impact that violates the ADEA. However, the appellate court expressed skepticism about the proposition that curtailing a benefit correlated with age, and coming closer to eliminating the role of age in pension calculations, can be understood as discrimination against the old.

The 7th Circuit pointed to Section 623 of the ADEA, which provides that “[n]othing in this section” prohibits an employer from “observing any provision of an employee pension benefit plan to the extent that such provision imposes [without regard to age] a limitation on the amount of benefits that the plan provides or a limitation on the number of years of service or years of participation which are taken into account for purposes of determining benefit accrual under the plan.” The court found that Northern Trust’s DB plan, both before and after the 2012 amendment, complies with Section 623.

Benefits depend on the number of years of credited service and the employee’s salary, not on age. Because salary generally rises with age, and an extra year of credited service goes with an extra year of age, the plan’s criteria are correlated with age, but this differs from age discrimination. “An employer would fall outside the §623(i) safe harbor if, for example, the amount of pension credit per year were a function of age rather than the years of credited service, or if pension accruals stopped or were reduced at a firm’s normal retirement age,” the court said in its opinion.