Supremes Mull Pension Deception

An ERISA claim against insurer Cigna threatens to heighten risks for plan sponsors.

A class-action pension-benefits claim by present and former Cigna employees under the Employee Retirement Income Security Act (ERISA) could have an unsettling effect on plan sponsors if the Supreme Court does not overturn two lower-court rulings in the nine-year-old case.

A federal district court ruled in 2008, and an appeals court affirmed last year, that when Cigna switched from a traditional defined-benefits retirement plan to a cash-balance plan in 1998, the new summary plan description (SPD) misled employees about the benefits they’d be entitled to.

Specifically, the SPD left employees with the incorrect understanding that they would begin accruing incremental benefits under the new plan immediately. But as stated in the detailed plan document, and as is common practice with such plan changes, each worker’s cash-balance account had a starting balance that was less than the value of his or her defined-benefit account. Thus, anyone who left the company before the new account caught up in value with the old one would not, in effect, have earned any new benefits. Many employees thought, based on the SPD, they were to get the full value of the first plan plus new benefits accruing from the date of the change. And the lower courts gave them that relief.

When retirement plans are changed, ERISA requires that an SPD outline the new provisions in a manner that the average employee can understand. But such changes are notoriously complex, and communications about them have frequently triggered litigation. The difference with this case is that the Supreme Court agreed to hear it, raising the stakes for the final outcome.

Cigna does not, in fact, dispute the finding that its SPD was misleading. Instead, its appeal before the high court focuses on the district court’s decision that all 27,000 participants in the lawsuit suffered “likely harm.” Those who were not likely to have done anything differently had the SPD been crystal clear should not get the higher retirement benefits, the insurer argues.

Cigna declined to comment. But an employee-benefits attorney not involved in the case, Myron Rumeld of the global law firm Proskauer, tells CFO, “Why wouldn’t you want to make a participant show he was harmed? The defendants would say it’s absurd to assume that even though people might have been unhappy with the new plan, everybody would have done something differently. Now they all get better benefits than the plan ever provided for.”

Former Solicitor General Theodore Olson, arguing for Cigna before the Supreme Court on November 30, claimed that an employee could have been harmed only if he would have left the company had he known he wasn’t accruing new pension benefits for a period of time. But plaintiffs’ attorney Stephen Bruce countered with a broader definition of harm. For example, he said, someone who correctly understood the new plan’s terms could have asked for it to be changed or for a different compensation package, or saved more money, or had his spouse work longer.

Justice Stephen Breyer offered that, given the district court’s finding that employees were likely harmed, it seemed “sensible” that it should be up to Cigna to prove that people were not harmed, case by case.

A decision by the top court would come sometime in the first few months of 2011. If the court lets the earlier decisions in the case stand, it would cost Cigna about $70 million, according to court records. But Rumeld says the ramifications would go far beyond Cigna, as plan sponsors generally would be unsure of their exposure if they make complicated changes to their plans.

It’s a scary issue for risk-minded CFOs, Rumeld says. With a pension plan, you’re supposed to know what it’s going to cost, based on what the actuaries tell you, so you can plan accordingly, he points out. Now, what the actuaries say may not be the end of the story. “It’s really not consistent with ERISA to stick plans with liabilities that they never properly funded for because they never anticipated them,” he says.

CFOs should carefully monitor summary plan descriptions, Rumeld advises. “I know they try to stay away from the ERISA geeks and let them deal with it, but this kind of claim can result in a very large liability,” he says. “It’s important that it be monitored.”

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