ERISA-Seventh Circuit Holds That Defined Benefit Plan Could Be Amended To Use A Higher Discount Rate (And Thus Pay A Lower Lump Sum Benefit)

In Dennison v. MONY Life Retirement Income Security Plan, No. 12-2407 (7th Cir. 2013), the plaintiff (“Dennison”) was appealing the district court’s grant of summary judgment to the defendant.

In this case, Dennison had been employed by Mutual of New York Insurance Company (“MONY”). While so employed he had participated in: (1) MONY’s Retirement Income Security Plan for Employees (“RISPE”), a tax-qualified defined benefit pension plan, and (2) the Excess Benefit Plan for MONY Employees (the “Excess Plan”), a nonqualified plan of deferred compensation for highly compensated employees. Both the RISPE and the Excess Plan entitled Dennison to benefits at age 55, and offered Dennison a choice of taking his benefits as a “straight life” annuity–a fixed monthly payment for the rest of his life–or as a lump sum. The lump sum form was represented to be the actuarial equivalent of the annuity, with actuarial equivalence depending on Dennison’s life expectancy and an interest discount factor.

Dennison choose the lump sum for his benefits under both plans. He received a check for the RISPE, in the amount of $325,054.28, and a check for the Excess Plan, in the amount of $218,726.38. To calculate the RISPE lump sum, the discount rate was a blended rate, called a “segment rate” under IRC section 417, of roughly 5.24 percent. To calculate the Excess Plan lump sum, a discount rate of 7.5% was used. Dennison claimed that the proper rate-which would have resulted in significantly higher lump sums-was a rate, computed by the Pension Benefit Guaranty Corporation (“PBGC”) on the basis of annuity premiums charged by insurance companies, of 3%. At the time Dennison left MONY’s employ, the RISPE generally provided that the discount rate would be the PBGC rate, the 3% rate, and the Excess Plan was using 7.5 percent. Dennison later brought this suit over the appropriate discount rate for RISPE and Excess Plan lump sums.

In analyzing the case, the Court noted that in the Pension Protection Act of 2006, Congress authorized employers to amend their plans to retroactively raise the plan’s discount rate to the segment rate. Before the Act, such an amendment would have violated ERISA’s anti-cutback rule. MONY used this authorization to amend the RISPE-shortly before Dennison reached age 55 and became entitled to benefits- to use the segment rate as the discount rate. The Excess Plan was not changed. The RISPE had a provision which proscribed amendments decreasing accrued benefits. However, the “accrued benefit” here is the participant’s benefit in life annuity form. Thus, the Court found that nothing prevented MONY from amending the RISPE to use a higher discount rate to compute lump sums. Further, the Court interpreted the Excess Plan, including its references to the RISPE and taking notice of prior practice, to be using the 7.5% discount rate. As such, the Court affirmed the district court’s summary judgment against Dennison.

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