Georgia-Pacific Corp. and Bell Atlantic Corp. have been hit with class-action lawsuits alleging they miscalculated lump-sums in connection with their cash balance pension plans , cutting retirement benefits for some employees.
Both lawsuits, the first known cases against employers with cash balance plans, allege the companies deliberately used interest rates and actuarial assumptions that resulted in smaller pensions.
The first case, Genevieve W. Corcoran, Thomas M. Erwin et al vs. Bell Atlantic Corp., was filed in U.S. District Court in Philadelphia Jan. 27. It alleges the company used the wrong interest rates to convert the present value of annuities into lump sums, then used those amounts as the opening account balances for employee accounts when it converted its traditional pension plan to a cash balance pension plan in December 1995.
The second lawsuit - Jerry L. Lyons vs. Georgia-Pacific Corp. Salaried Employees Retirement Plan - was filed in U.S. District Court in Atlanta last month. The lawsuit claims an employee who quit the company in 1991 and asked for a lump sum two years later received a smaller amount than he should have because the company did not adhere to the Internal Revenue Service formula for converting annuities to lump-sum payments.
In the case of Bell Atlantic, the lawsuit alleges the company used a September 1995 rate prescribed by the Pension Benefit Guaranty Corp. instead of the December 1995 rate to convert the present value of annuities into a lump sum. Since the December discount rate was lower, it would have resulted in larger lump sums.
The company's use of "inappropriate discount rates and mortality assumptions" in calculating the lump sums violated federal pension law, the lawsuit alleges.
Unlike ordinary defined benefit pension plans, in which employees have little idea of how much money their employers are setting aside, cash balance plans let workers know exactly how much money they are building in their retirement accounts each year, using a predetermined interest rate. Cash balance plans also offer employees greater portability, letting them walk away with a lump sum if they quit the company.
The Bell Atlantic suit also alleges the company - which is merging with NYNEX Corp. - violated federal pension law when it cut short its early retirement program for employees just months before they became eligible.
Many companies that revamp their pension plans protect older employees with decades of experience from dramatic losses in benefits. But Bell Atlantic made no such effort to ensure employees with fewer than 30 years of experience would still see a spike in their retirement benefits on reaching that anniversary, according to a pension law expert who did not wish to be identified.
Under cash balance plans, there is no stipulated "early retirement date" at which employees can collect the bulk of their benefits because workers can cash out of the plan with a lump sum whenever they leave their jobs.
The lawsuit states that as many as 18,540 Bell Atlantic executives stand to lose some of their pension benefits because of the manner in which the company converted its defined benefit plan to a cash balance pension plan.
The lawsuit asks that Bell Atlantic recalculate the opening balance of all affected executives using the correct interest rate and mortality assumptions, and to credit the employees' accounts with additional money they would have earned on their initial balance had it been correctly calculated initially.
The lawsuit also seeks to have the company reinstate affected employees' eligibility for early retirement and pay all legal costs.
The company has until May 28 to file its response to the lawsuit.
The lawsuit could delay the proposed merger of Bell Atlantic's pension plan with NYNEX's plan, which, according to speculation, wants to adopt Bell Atlantic's cash balance structure.
"If the lawsuit is successful, it might affect how they convert the NYNEX plan," said James R. Malone Jr., partner at the Haverford, Pa., law firm of Chimicles, Jacobsen & Tikellis, which is the leading firm representing the Bell Atlantic executives.
But Jay Grossman, a Bell Atlantic spokesman, said: "The suit is without merit and we will defend ourselves vigorously."
In the Georgia-Pacific lawsuit, the plaintiffs charge the Atlanta-based paper producer did not stick to IRS regulations requiring companies to conduct two elaborate and complex calculations to arrive at the lump sums.
Under the IRS regulations, companies must first determine what the account balance would grow to at retirement age by using the interest rate stipulated by the employer to credit money to the account each year. Next, employers are required to figure out how much of an annuity that account balance at retirement age would amount to. Finally, employers must determine the present value of the annuity by discounting back the account balance at retirement age using an interest rate stipulated by regulators.
Both calculations involve complex interest rate and indexing assumptions. As many as 1,000 to 5,000 employees could be affected.
If the interest rate companies use to credit additional money to employees' accounts each year is higher than the rate specified by regulators for calculating the present value of annuities, the lump sum usually is larger than the account balance. In that instance, the IRS requires companies to give employees the larger of the two.
But, the lawsuit points out, the company simply gave Mr. Lyons the amount built up in his account as a lump sum. If the benefit had been properly calculated, according to the lawsuit, the lump-sum distribution would have been "substantially more" than the account balance. The complaint does not state how much more.
A Georgia-Pacific spokesman said it is the company's policy not to comment on matters involving litigation. The $1.7 billion plan was converted to a cash balance plan in 1989.
Robert P. Geller, an attorney with the firm of Hertz, Schram & Saretsky, Bloomfield Hills, Mich., co-counsel for Mr. Lyons, said Georgia-Pacific has not yet filed a response to the complaint. The response is due May 27, he said.
While the Bell Atlantic suit might at best be a minor irritant in the company's proposed merger of its pension plan with NYNEX after federal authorities clear the merger of the two companies, the Georgia-Pacific case could have "a very chilling effect" on employers contemplating converting their traditional pension plans into cash balance plans, said a pension lawyer and expert on cash balance plans, who did not wish to be identified.
"Employers are going to be much more careful about the interest rate . . . and will promise people a much lower interest rate." That, in turn, "makes cash balance plans much less attractive to employees and therefore to employers."
The pension expert also said Bell Atlantic executives probably have little recourse as long as Bell Atlantic has preserved the benefits they already had earned.
"It doesn't make any difference what interest rate they used to calculate the opening balance as long as they preserved the old benefit," he said. Under the Employee Retirement Income Security Act, employers cannot cut benefits employees already have earned, but maintain the right to cut future benefits as long as the plan is properly amended.
Jerry Mingione, a principal in the Philadelphia office of Towers Perrin, noted it is improbable Bell Atlantic made any mistakes in calculating lump sums when it converted to a cash balance plan.
"Employers really study it every which way before they implement these plans," said Mr. Mingione, whose company advises Bell Atlantic. The company's "transition involved a number of complicating factors that employees only partially understood."
Mr. Geller could not say if the Georgia-Pacific suit would have broad implications for the cash balance industry, but said "I suspect there are other cases like this."
According to one ERISA attorney familiar with the Georgia-Pacific case who asked not to be identified said "it is almost certain" the Georgia-Pacific action will trigger other suits.
However, Dennis Coleman, principal at the Kwasha Lipton Group, Fort Lee, N.J., said the Georgia-Pacific suit is "company specific" and will have no broad implications for cash balance plans.
He said many problems outlined in the Georgia-Pacific complaint were addressed in an early 1996 IRS notice that provided that plans using one of several specific and acceptable crediting rates would not be required to project annuity benefits forward to the normal retirement age and then discount that to the present value.
Mr. Coleman said the vast majority of cash balance plans have been amended to comply with IRS regulations, which still are not final, and will not face problems spelled out in the Georgia-Pacific complaint.
"This case is an historical anachronism dealing with facts of long ago when cash balance plans were in their infancy. This will be of isolated historical significance. Most plans have been amended to avoid problems" with the two-step calculations, said Mr. Coleman.