AT&T Faces Challenge to Early Retirement Benefit Calculations

Former participants in the AT&T Pension Benefit Plan have sued AT&T and the plan claiming their benefits were reduced because of the way benefits are calculated for those who retire before age 65.

According to the complaint, the plaintiffs and proposed class members are forced to forfeit accrued, vested pension benefits if they retire before age 65 and/or receive their pension benefit in the form of a Joint and Survivor Annuity. They say this is because the plan’s terms reduce these alternative forms of benefits using “Early Retirement Factors” and “Joint and Survivor Annuity Factors,” which result in plan participants receiving less than the actuarial equivalent of their vested accrued benefit, as required by the Employee Retirement Income Security Act (ERISA).

The plaintiffs explain that a participant’s pension benefit is expressed as a monthly pension payment beginning at “normal retirement age,” which is age 65 under the AT&T plan. This monthly payment is a single life annuity because it pays a monthly benefit to the participant for the participant’s entire life. Under ERISA, “if an employee’s accrued benefit is to be determined as an amount other than an annual benefit commencing at normal retirement age [of 65] . . . the employee’s accrued benefit . . . shall be the actuarial equivalent of such benefit . . . .”

Thus, the complaint says, ERISA requires that if a plan allows a participant to retire early with a reduced monthly pension, the value of his reduced monthly pension must be actuarially equivalent to the participant’s monthly pension benefit commencing at age 65. The case concerns two ways in which the AT&T plan improperly reduces pension benefits, in violation of ERISA’s actuarial equivalence rules.

First, the plaintiffs allege the plan’s Early Retirement Factors reduce benefits to less than the actuarial equivalent amount of the participant’s monthly benefits commencing at age 65. The earlier the participant retires, the greater the reduction to his benefits. For example, under most programs of the plan, if a participant’s normal pension benefit beginning at age 65 is $10,000 per month, and he retires at age 60, his monthly benefit is reduced by a factor of 0.58. As a result, the value of his monthly benefit is 58% of $10,000, or $5,800 per month, when the actuarial equivalent benefit he is entitled to receive under ERISA is approximately $7,090 per month.

Second, the plaintiffs point to applicable Treasury regulations that say, “A qualified joint and survivor annuity must be at least the actuarial equivalent of the [single life annuity]. Equivalence may be determined, on the basis of consistently applied reasonable actuarial factors.” A joint and survivor annuity is expressed as a percentage of the benefit paid during the retiree’s life. For example, a 50% joint and survivor annuity provides a surviving spouse with 50% of the amount that was paid during the retiree’s life.

The plaintiffs allege that the plan’s Joint and Survivor Annuity Factors reduce benefits to less than the actuarial equivalent amount of a participant’s benefit expressed as a single life annuity. For example, if a participant’s single life annuity benefit is $10,000 per month, and he is married, his default form of benefit is a 50% joint and survivor annuity, which is reduced by a factor of 0.90 for most programs under the plan. As a result, the participant’s monthly benefit is 90% of $10,000 per month, or $9,000 per month, when the actuarial equivalent benefit he is entitled to receive under ERISA is approximately $9,200 per month.

The plaintiffs say the to the best of their knowledge based on the available information, the Early Retirement Factors and the Joint and Survivor Annuity Factors in the AT&T plan applicable to the class have not been updated in over a decade, despite dramatic increases in longevity. “Because the Early Retirement and the Joint and Survivor Annuity Factors have not been updated to be in line with reasonable actuarial assumptions, they do not yield actuarially equivalent payments to Class members as required by ERISA. As a result, Defendants have improperly reduced Class members’ pension benefits in violation of ERISA’s actuarial equivalence requirements,” the complaint says.

In addition, the plaintiffs say, ERISA Section 203(a) provides that an employee’s right to his or her vested retirement benefits is non-forfeitable and states that paying a participant less than the actuarial equivalent value of his accrued benefit results in an illegal forfeiture of his benefits. “Thus, the Plan’s terms that reduce participant benefits to less than their actuarial equivalent value violate ERISA’s anti-forfeiture requirement set forth in [Section] 203(a).”