ERISA Lawsuit Argues Outdated Mortality Assumptions Harm Annuitants

A new complaint filed in the U.S. District Court for the Eastern District of Virginia resembles several others filed in the last year against MetLife, Pepsi and American Airlines, suggesting the use of outdated mortality tables in determining annuity payments causes retirees to lose part of their vested retirement benefits.

This latest complaint targets Huntington Ingalls Industries, which refers to itself on its website as “America’s largest military shipbuilding company and a provider of professional services to partners in government and industry.” With some nuances in each case, the basic argument being put forward is that these employers are failing to pay the full promised value of ‘alternative benefits,’ in that they are failing to ensure different annuity options made available in a retirement plan are actuarially equivalent to the plan’s default benefit, as required by the Employee Retirement Income Security Act (ERISA) and the terms of the plans themselves.

According to the text of the would-be class action, under the part of the Huntington plan that covers employees hired before June 7, 2004, dubbed the “legacy part,” participants accrue a retirement benefit that is a flat monthly rate for each year of service in the form of a single life annuity (SLA), described as “a payment stream that starts when they retire and ends when they die.”

The complaint suggests participants can choose from several forms of benefits other than an SLA, including joint and survivor annuities, which offer payment streams for retirees’ lives and their spouse’s lives after the retiree dies, and a “Social Security leveling option annuity,” which according to the complaint enables “early retirees to collect pension benefits until they begin receiving Social Security benefits at which point their pension benefits would be lowered.” Collectively, these options are referred to in the complaint as “non-SLA annuities.”

“To calculate the benefit amounts for retirees who receive these non-SLA annuities, defendants apply actuarial assumptions to calculate the present value of the future payments,” the complaint states. “These assumptions are based on a set of mortality tables to predict how long the participant and beneficiary will live and interest rates to discount the expected payments. The mortality table and interest rate together are used to calculate a ‘conversion factor’ which is used to determine the amount of the benefit that would be equivalent to the SLA.”

Under ERISA, the present value of the non-SLA Annuities must be equal to the value of the SLA for the forms of payment to be “actuarially equivalent.”

“Mortality rates have improved over time with advances in medicine and better collective lifestyle habits,” the complaint continues. “People who recently retired are expected to live longer than people who retired in previous generations. Older morality tables predict that people will die at a faster rate (higher mortality rate) than current mortality tables. As a result, using an older mortality table to calculate a conversion factor decreases the present value of the non-SLA annuities and—interest rates being equal—the monthly payment that retirees who select these non-SLA Annuities receive.”

The complaint states that the Huntington defendants calculate the conversion factor (and thus the present value of the non-SLA annuities) for the legacy part of the plan using the 1971 Group Annuity Mortality Table. This table assumes 90% of the employees are male, and that 90% of contingent annuitants are female, while utilizing a 6% interest rate.

“Using the 1971 table, which is based on data collected roughly 50 years ago, depresses the present value of non-SLA annuities, resulting in monthly payments that are materially lower than they would be if defendants used reasonable, current actuarial assumptions,” the complaint alleges. “By using outdated mortality assumptions to calculate non-SLA annuities under the legacy part, defendants improperly reduce plaintiff’s benefits.”

Specifically, the complaint calls for an order from the Court reforming the plan to conform with ERISA; payment of future benefits in accordance with the reformed Plan, as required under ERISA; payment of amounts improperly withheld; and such other relief as the Court determines to be just and equitable.

The lead plaintiff goes on to point out that more recent mortality tables are “two-dimensional” in that the rates are based not only on the age of the individual but the year of birth—and that the Society of Actuaries (SOA) has published updated tables five times since 1971, most recently in 2014, with the express stated purpose of accounting for changes in the U.S. population’s mortality experience. And just in May of this year, the SOA released an exposure draft of new private-sector retirement plan mortality tables.

The full text of the complaint is available here.