While sympathizing with the participant-plaintiffs in the case, a federal judge finds no obligation to use “reasonable” life expectancy and interest rates in a pension calculation conversion.
Plaintiffs Thomas Reichert, Stuart Buck, and Kenneth Henrich (on behalf of themselves and others similarly situated) sued defendants Bakery, Confectionary, Tobacco Workers and Grain Millers Pension Committee, Kellanova, WK Kellogg Company, Kellanova Pension Plan, and John Doe, alleging that defendants’ pension plans violated the Employee Retirement Income Security Act (ERISA).
More specifically, the plaintiffs alleged that defendants used outdated mortality tables and outdated assumptions when they converted plaintiffs’ single life annuities (SLAs) to joint survivor annuities (JSAs) and thereby violated ERISA’s actuarial equivalence requirements. They also alleged that this constituted a breach of fiduciary duty.
At which point the defendants moved to dismiss the complaint and the court held a hearing.
Background
Kellogg established two pension plans in 1975: the BCTGM Plan (which covers workers represented by the Bakery, Confectionery, Tobacco Workers and Grain Millers Union) and the Kellanova Pension Plan (which covers other company employees). Each of the retirees in question had elected to receive his pension benefits in the form of a joint and survivor annuity (JSA), making his spouse the beneficiary after he died.
In calculating the monthly payments, the Kellogg retirement plans relied on actuarial assumptions consisting of an interest rate and a mortality table. However, using tables to do so that were outdated presumably produced results—even though the retirees admitted they weren’t sure what assumptions were actually used—that meant that the retirees received lower payouts than they would receive if the data was current, resulting in the SLA and JSA benefits no longer being actuarially equivalent.
Review Standards
As is customary in such things, U.S. District Judge Stephen J. Murphy III began his analysis (Reichert et al. v. Kellogg Co. et al., case number 2:23-cv-12343, in the U.S. District Court for the Eastern District of Michigan) by reviewing—well, the standards for review. More specifically, that in order to grant a motion to dismiss under Federal Rule of Civil Procedure, the suit must fail to allege facts “sufficient ‘to raise a right to relief above the speculative level,’ and to ‘state a claim to relief that is plausible on its face.’” Judge Murphy also acknowledged that, in making those considerations, the court “views the complaint in the light most favorable to the plaintiff, presumes the truth of all well-pleaded factual assertions, and draws every reasonable inference in the nonmoving party’s favor.”
That said, he also noted that “the Court will not presume the truth of legal conclusions in the complaint.”
One Dispositive Issue
Judge Murphy noted that “defendants raised several arguments in their motion to dismiss, but the Court need only address one dispositive issue: whether ERISA requires Plan administrators to regularly update the assumptions and mortality tables used in the actuarial equivalence calculation so that the assumptions are ‘reasonable.’”
That was an issue here because the plaintiffs’ complaint challenged decades-old formulas based on 50-year-old mortality data, and—as noted above, they argued that “reliance on the outdated data was unreasonable and violated ERISA’s actuarial equivalent requirement.” In response, Judge Murphy noted that the defendants had countered that the statute does not contain any reasonableness requirement, and “there is no requirement in ERISA that Defendants regularly update their tables.”
And on that latter point, Judge Murphy concurred. He noted that “ERISA requires qualified JSAs to be actuarially equivalent to the SLA offered”—that “when converting an SLA into a JSA, ERISA requires the resulting JSA to be the ‘actuarial equivalent’ of the SLA.” He went on to explain that “although ERISA does not define actuarial equivalence, Plaintiffs argued that achieving actuarial equivalence requires equal present values for both types of benefits,” that “present value must ‘reflect anticipated events’ and ‘conform’ with Treasury regulations that mandate assumptions realistically projecting future events.”
Assumption Presumptions
However, Judge Murphy said those references apply to actuarial equivalence calculations that deal only with lump-sum payments, that “the text of 29 U.S.C. § 1055(d) does not require that Plans employ certain assumptions or mortality tables. Similarly, § 1055 does not impute a ‘reasonableness’ requirement on the actuarial equivalence computation, and unlike the law applicable to a lump-sum payment, there is no federal regulation to impute a reasonableness requirement.”
Judge Murphy not only found no binding case law that addresses the precise issue, but went on to note that the Sixth Circuit and the United States Supreme Court “clearly established applicable principles of statutory construction that require the Court to grant the motion to dismiss,” and that those parameters meant that “courts should therefore be ‘reluctant to tamper with the enforcement scheme embodied in the statute by extending remedies not specifically authorized by its text.’”
That said, Judge Murphy said he sympathized with the plaintiffs’ position and “agrees that ‘[t]aken to the extreme, the [D]efendants’ argument suggests that they could have used any mortality table—presumably, even one from the sixteenth century—to calculate the plaintiffs’ JSAs’”—and that if true, “the actuarial equivalence requirement would be rendered meaningless.”
But ultimately, Judge Murphy said he “must apply the law that Congress passed and does not have the authority to make new policy.”
“It would appear that a Congressional remedy would provide a path to address reasonable concerns about extreme application of mortality data,” he wrote. “Plaintiffs brought their claim under 29 U.S.C. § 1132 (a)(3). That section provides a remedy for a violation of ‘any provision of this subchapter.’ But for the reasons stated above, the use of outdated mortality tables and assumptions does not violate the statute.”
Having acknowledged that standard, Judge Murphy proceeded to dismiss Plaintiffs’ claim that Defendants violated § 1055 of ERISA. “And because Plaintiffs failed to plead an ERISA violation, they cannot sustain a claim for breach of fiduciary duty based on an ERISA violation. The Court will accordingly dismiss Plaintiffs’ claim that Defendants breached their fiduciary duty.”
