Court Rules Pension Plan Change Did Not Violate Law

A US court of appeals has ruled that a change in the benefit formula for a defined benefit pension plan is not an illegal cutback in accrued benefits and doesn’t constitute age discrimination.

The case stems from a 2012 change financial services company Northern Trust made to its pension plan. Until then it had a defined-benefit plan under which retirement income was based on years worked, multiplied by an average of the employee’s five highest-earning consecutive years, times a constant. This is also known as the traditional formula. But under the amended plan, income was determined by multiplying the years worked and the high average compensation by a formula that depends on the number of years worked after 2012, not by a constant.

Out of concerns for upsetting workers who had relied on the traditional formula, Northern Trust offered people hired before 2002 a transitional benefit, treating them as if they were still under the traditional formula except that it would deem their salaries as increasing at 1.5% per year, regardless of the actual rate of change in their compensation.

James Teufel, the plaintiff in the lawsuit, contended that the amendment, even with the transitional benefit, violated the anti-cutback rule in the Employee Retirement Income Security Act of 1974 (ERISA). The anti-cutback rule states that the accrued benefit of a participant under a plan may not be decreased by an amendment to the plan. Teufel also argued that the amended plan harms older workers relative to younger ones, and therefore is in violation of the Age Discrimination in Employment Act (ADEA).

For more stories like this, sign up for the CIO Alert newsletter. 

In its ruling, the court said that if Northern Trust had terminated the plan, calculated Teufel’s accrued benefit, and deposited that sum in a new plan with additions to come under the new formula, then Teufel would not have had any complaint, and he conceded this, according to court documents.

“What actually happened is more favorable to him,” said the court. “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 shot down Teufel’s argument that the expectation of future salary increases should be treated as an accrued benefit, adding that the only benefit that had accrued was the sum due for work already performed.

“A reduction in the rate of salary increases could not violate ERISA, which does not require employers to increase anyone’s salary,” said the court.

The court also wasn’t swayed by Teufel’s claims of age discrimination. The argument was that the traditional formula is more valuable to older workers because the five highest-earning consecutive years are greater the older one gets, thus eliminating the formula harms older workers more than younger ones.

“We are skeptical about the proposition that curtailing a benefit correlated with age, and so coming closer to eliminating the role of age in pension calculations, can be understood as discrimination against the old,” said the court. “Kentucky Retirement Systems holds that a pension benefit for older workers does not violate the ADEA, but not that any such benefit, once extended, must be continued for life.”

Tags: James Teufel, Litigation, Northern Trust, Pension

The Louisiana State Employees Retirement System (LASERS) is no longer hot on the creation of a new pension plan for rank-and-file members, falling more in line with Gov. John Bel Edward’s opposition to the bill the new plan, which he criticizes for trimming benefits.

Although the bill had advanced through two Senate committees and awaits final passage on the Senate floor, the $11 billion pension plan decided on Monday it would no longer pursue the measure.

“In Louisiana, our state employees do not participate in Social Security,” a LASERS spokesperson told CIO. “However, the administration has requested that we conduct additional study before moving forward and we have agreed.”

With a current funding status of 63%, the plan had initially backed the bill because it would have provided a form of Social Security for 70% of its members that won’t qualify for a lifetime benefit.

Never miss a story — sign up for CIO newsletters to stay up-to-date on the latest institutional investment industry news. 

The bill is sponsored by Senate Retirement Chairman and Republican Barrow Peacock.

Supporters of the proposal touted the move would reduce pension debt buildup while giving state workers a more portable type of retirement benefit as well as a clause that put cost-of-living adjustments into the new plan. The provision would allow for workers who left the state payroll before retirement eligibility to move the benefit option on a sliding scale for the first four years.

According to the state data lab, Louisiana is experiencing a $9.5 billion pension deficit.

Meanwhile, Edwards, a Democrat and opponent of the proposal, argued that the measure would reduce benefits while raising the costs for workers. Additional concerns raised by detractors was the $10 million-plus in upfront costs to the state over the first five years as well as transferring more of the cost risks to employees.

Treasurer John Schroder, a Republican, was unhappy with both Edwards’ opposition as well as the retirement system’s decision to shelve the proposal, as he claimed the bill would have created “a better structure and long-term outcomes” for state employees and the retirement system.

“This is why the public doesn’t trust government,” he said in a statement.

The pension bill would have put workers hired on or after Jan. 1, 2020, into a 401(k)-style plan while also raising the retirement age to 65 from the current 60-62. Employees hired on or after July 1, 2006, would be given a window to opt into the new plan.

Law enforcement or other hazardous-duty positions, judges, teachers, or public school employees were to be excluded from the shift to the new pension plan.

Both the Senate and House are Republican-controlled. Considering that the bill is awaiting final passage, it is expected to pass regardless of the state pension system’s involvement.

Tags: LASERS, Pension, Senate