NEW YORK - Attorneys for Harris Trust & Savings Bank, the plaintiff in a long-running battle with John Hancock Mutual Life Insurance Co., declared last week they have demonstrated Hancock did not comply with its fiduciary duties under ERISA.
The case, which dates from 1983 and was expected to conclude Sept. 2, has been under way at U.S. District Court in the Southern District of New York for much of the past two weeks. It centers on whether Hancock mismanaged up to $50 million in excess assets generated by an insurance contract purchased by Sperry Corp. (now Unisys Corp.) to cover retiree benefits.
Harris, trustee for Unisys, has argued the money belongs to Unisys.
Lawrence Kill, lead attorney for Harris, said Hancock has been relying on a literal interpretation of the contract, but that the Employee Retirement Income Security Act supersedes those provisions.
"ERISA requires that a pension manager act in the interests of the plan, and Hancock has admitted many times that it has acted in its own interests," Mr. Kill said in an interview.
What to do with excess cash
ERISA says a manager can't take the excess money generated by a contract and invest it in its own businesses, which Hancock has done. The money must be invested in fixed income, annuities or some other vehicle that will benefit the retirees covered under the plan, Mr. Kill argued.
But Hancock engaged in transactions prohibited under ERISA by using the excess funds to invest in buildings for its own subsidiaries, he said.
Harris is seeking $40 million to $50 million in damages from Hancock.
Howard Kristol, lead attorney for Hancock, disagreed: "It is our position that Hancock's conduct with respect to excess or 'free funds' was intended to be in compliance with federal law under ERISA as well as with the state law. We complied with all the laws that were applicable."
Defending Hancock's actions
Even though Sperry was a beneficiary that suffered as a result of business decisions made by Hancock, because assets were commingled in Hancock's general account, the assets were not separate, nor were they required to be, Mr. Kristol contended.
Hancock's actions did not constitute a prohibited transaction, he said. And one has to wonder why Sperry never told Hancock it was breaching ERISA fiduciary duties, he added.
District Judge Denny Chin, who is presiding over the non-jury trial, is expected to rule on the matter later this year.
Mountains of evidence
He is the seventh judge to sift through mountains of evidence in the complex pension law case that went all the way to the U.S. Supreme Court in 1993. The high court ruled that certain excess assets from insurance contracts are subject to federal laws under ERISA and sent the case back to the lower court to rule on damages.
More than 3,000 exhibits have been offered as evidence in this latest chapter of the case.
Much of the testimony on both sides involved analysis of various amendments and revaluations of the original contract.
Robert Moreen, actuarial consultant and principal at William M. Mercer Inc., New York, testified for the plaintiff that Hancock's contractual assumptions were unreasonable by the end of 1981. "They had no mechanism built into them to keep them up to date with evolving economic conditions. Their revaluation assumptions were an improvement on the contractual assumptions, but they were probably more conservative than they needed to be."
Mr. Moreen added that Hancock was valuing liabilities far too conservatively. When Hancock proposed a revaluation of the contract to bring it in line with inflation, it also asked for certain deductions Mr. Moreen argued were unnecessary, because there was plenty of money in the contract for Hancock to make the necessary payouts.
Last cost-of-living raise in '88
Brian Lucas, associate general counsel for the Unisys pension plan, which now is valued at $4 billion, said retirees covered under the Unisys plan last received a cost-of-living raise in 1988 when Sperry and Burroughs Corp. merged to form Unisys. If Unisys makes a substantial recovery in the case, it plans to raise pensioners' benefits, he said.
Richard Raskin, consulting actuary at Buck Consultants Inc. on Sperry's pension plan from 1965 to 1983, testified for the plaintiff that at that time, insurance companies allocated too much of the pension assets they oversaw to their general accounts instead of to equities. Two other insurance companies he worked with at the same time agreed to provide for the removal of excess assets, but Hancock refused, he said.
Once ERISA was passed, employers were forced to reconsider their roles as fiduciaries and had to diversify, Mr. Raskin said. As a result, Tom Hirschberg, who was in charge of Sperry pension assets in 1979, asked Hancock to refund excess assets. Sperry wanted the money returned, because company officials were convinced they could generate a better return investing the money through the Sperry Trust (their own investment vehicle which has its own money managers) than it was getting from Hancock, Mr. Raskin said.
Roger Ibbotson, founder of Ibbotson Associates Inc., Chicago, calculated damages due the plaintiff could amount to $40 million to $50 million. He arrived at the range by figuring the difference between what the excess assets of $13 million might have earned between 1981 and 1988 if invested by Hancock, compared with how much more they might have earned had Sperry invested them through its own trust. Mr. Ibbotson then compounded that amount over time and included the interest those funds would have earned from 1988 to 1997.
By 1988, excess assets in the Sperry contract had swelled to $55 million, more than Hancock needed in its reserves to pay guaranteed benefits, Mr. Kill said. "The amount was so large it was embarrassing, so Hancock returned $53 million to Sperry at that point."
David Babbel, who teaches finance and insurance at the Wharton School, University of Pennsylvania, began his testimony for the defense Thursday, disputing the calculations made by Messrs. Ibbotson and Moreen. He said Hancock's revaluation of the contract was appropriate and if it were to be revalued according to Mr. Moreen's assumptions, it could have no money left to pay retiree benefits.
Also testifying for the defense earlier this week was John Penney Jr., a Hancock underwriter who had worked on the Sperry contract. He said that as far as he knew, prior to 1985, Sperry never asked about transferring the excess funds to another company. He also said it was his belief Sperry had the ability from 1968 on to transfer excess funds in whole or in part to a supplemental fund and, that if Sperry did request such a transfer, it wouldn't have any effect on the pension administration fund.