Skip to main content
MENU
Subscribe
  • Subscribe
  • Account
  • LOGIN
  • Topics
    • Alternatives
    • Consultants
    • Coronavirus
    • Courts
    • Defined Contribution
    • ESG
    • ETFs
    • Hedge Funds
    • Industry Voices
    • Investing
    • Money Management
    • Opinion
    • Partner Content
    • Pension Funds
    • Private Equity
    • Real Estate
    • Russia-Ukraine War
    • SECURE Act 2.0
    • Special Reports
    • White Papers
  • Rankings & Awards
    • 1,000 Largest Retirement Plans
    • Top-Performing Managers
    • Largest Money Managers
    • DC Money Managers
    • DC Record Keepers
    • Largest Hedge Fund Managers
    • World's Largest Retirement Funds
    • Best Places to Work in Money Management
    • Excellence & Innovation Awards
    • WPS Innovation Awards
    • Eddy Awards
  • ETFs
    • Latest ETF News
    • Fund Screener
    • Education Center
    • Equities
    • Fixed Income
    • Commodities
    • Actively Managed
    • Alternatives
    • ESG Rated
  • ESG
    • Latest ESG News
    • The Institutional Investor’s Guide to ESG Investing
    • ESG Sustainability - Gaining Momentum
    • Climate Change: The Inescapable Opportunity
    • Impact Investing
    • 2022 ESG Investing Conference
    • ESG Rated ETFs
  • Defined Contribution
    • Latest DC News
    • DC Money Manager Rankings
    • DC Record Keeper Rankings
    • Innovations in DC
    • Trends in DC: Focus on Retirement Income
    • 2022 Defined Contribution East Conference
    • 2022 DC Investment Lineup Conference
  • Searches & Hires
    • Latest Searches & Hires News
    • Searches & Hires Database
    • RFPs
  • Performance Data
    • P&I Research Center
    • Earnings Tracker
    • Endowment Returns Tracker
    • Corporate Pension Contribution Tracker
    • Pension Fund Returns Tracker
    • Pension Risk Transfer Database
    • Future of Investments Research Series
    • Charts & Infographics
    • Polls
  • Careers
  • Events
    • View All Conferences
    • View All Webinars
    • 2022 Retirement Income Conference
    • 2022 Managing Pension Risk & Liabilities
    • 2022 WorldPensionSummit
Breadcrumb
  1. Home
  2. Print
October 15, 2001 01:00 AM

CASH BALANCE CLASS ACTION

Interest rate decision may cost BOC Group millions of dollars

Vineeta Anand
  • Tweet
  • Share
  • Share
  • Email
  • More
    Reprints Print

    MURRAY HILL, N.J. - A candid talk about BOC Group Inc.'s cash balance pension plan by Gerard J. Murray, director of employee benefits plans, could cost the chemicals and gas producer tens of millions of dollars.

    A tape recording of Mr. Murray's discussion at an actuaries' conference in 1993, and the transcript of that recording, are the key pieces of evidence in a class-action lawsuit filed by retirees and former employees in the U.S. District Court for the Southern District of Illinois in East St. Louis. The lawsuit, William McClintock et al vs. the BOC Group Cash Balance Retirement Plan, alleges the company violated federal pension law when it incorrectly calculated lump-sum payments it made to thousands of departing employees since June 1991, resulting in far lower payouts than they were owed.

    BOC converted its defined benefit pension plan to a cash balance plan in 1986. The plan, which had assets of $626 million and accrued actuarial liabilities of $346 million at the beginning of 1998, is hugely overfunded. The company has not contributed to the plan for years. BOC handed out one-time pension payments to at least 5,400 departing employees between 1993 and 2000, according to court documents.

    The recording reveals Mr. Murray fully expected the company's pension plan would face a legal challenge on the calculation of lump-sum payments. "As of right now, we've not had that issue come up. It's just a matter of time though, as far as I'm concerned. It's going to happen," Mr. Murray told the group of actuaries eight years before the lawsuit was filed.

    `Smoking gun'

    "Some might say this tape is as close to a smoking gun as you'll find in pension litigation," said William K. Carr, a Denver-based attorney representing the plaintiffs.

    Mr. Murray declined to comment on the lawsuit.

    Two law firms are listed in court documents as representing BOC. Lewis R. Clayton, partner in the New York firm of Paul, Weiss, Rifkind, Wharton & Garrison, said his firm no longer represents the company. Michael Reda, partner in the Edwardsville, Ill., firm of Burroughs, Hepler, Broom, MacDonald, Hebrank & True, did not return phone calls seeking comment.

    In court papers filed Aug. 20, the company asked the court to dismiss the case or be allowed to move it to New Jersey, where BOC, the U.S. subsidiary of a British corporation, is based. BOC requested the change in venue ostensibly because of concerns that the federal judge in Southern Illinois, who recently ruled against Xerox Corp., Stamford, Conn., in a similar case, might be partial toward participants. "The named plaintiffs have no relevant evidence; indeed there is no relevant evidence in this district," the company claimed in the court papers.

    Cash balance plans allow companies to create hypothetical individual accounts for participants and credit those accounts annually with a percentage of the participant's salary and interest, frequently linked to the rate on benchmarks such as Treasury securities or annual consumer price index changes.

    Had BOC calculated the lump-sum payments for departing employees by projecting their hypothetical account balances to age 65 and then discounting that back to arrive at the present value of the pensions, it would have ended up giving far higher payouts, according to the plaintiffs' lawsuit.

    Rate changes

    The problem arose because BOC, in its plan documents, informed employees it would credit their accounts with the annual changes in the CPI, or the annual interest rate on one-year Treasury bills, whichever was lower. Instead, the company amended the plan each year since 1988 to credit employees' hypothetical accounts with a far higher interest rate, two percentage points above the return on one-year T-bills. Using a higher interest rate than one specified by regulators leads to what is known as a "whipsaw" problem: The employer must pay out a lump sum far greater than the account balance.

    Like many other employers, BOC retained the right to credit employees' accounts with higher interest than it had promised, especially in years when pension investments earned higher returns. Giving employees a higher interest rate than promised makes it easier for employers to sell the benefits of a cash balance plan to workers. The company ostensibly could have avoided a lawsuit if it used differing interest rates to credit employees' accounts. But the company credited employees' accounts with the same rate year after year, some sources say.

    That is the crux of the dispute in this case. Because the company amended its plan each year to credit participants with an interest rate that was higher two points higher than that on the T-bills, plaintiffs argue that rate, in effect, became the permanent one. In the suit, they cite a Treasury regulation that says repeating an amendment year after year can result in its being viewed as permanent.

    And in the discussion of BOC's cash balance plan at the meeting of actuaries, Mr. Murray admitted as much. "As far as interest is concerned, we have taken what some will consider an aggressive approach in that we determine interest annually. There are some legal issues behind that as to how often you can do that," he said, according to a transcript of the session.

    Counter argument

    Still, some sources suggest the company could argue that its discretion in changing interest rates each year on its cash balance plan is no different from plan sponsors setting up early retirement programs or "windows," so known because they typically have a limited life. In fact, Paul V. Strella, a consultant in the Washington office of William M. Mercer Inc. and a panelist at the actuaries' conference, made that case during the discussion of the BOC plan.

    But, he also warned that employers risked those annual amendments' being treated as permanent features of the plan.

    Mr. Strella did not return numerous calls seeking comment.

    Recommended for You
    Read the print edition of P&I
    Read the print edition of P&I
    How low is low? Projections say it's not low enough
    How low is low? Projections say it's not low enough
    FINRA honors Wharton's Olivia Mitchell with Ketchum Prize
    FINRA honors Wharton's Olivia Mitchell with Ketchum Prize
    Private Markets
    Sponsored Content: Private Markets

    Reader Poll

    August 10, 2022
    SEE MORE POLLS >
    Sponsored
    White Papers
    Gaining Momentum: Where Next for Trend-Following?
    The market opportunity in U.S. residential mortgage-backed securities
    Credit Indices Evolve with Enhanced Data Inputs
    Hedge Funds 2.0: Back to the future
    How Has 2022's Carnage Reshaped Global Stock and Bond Markets?
    Crossroads: Politics, Inflation, & Bonds
    View More
    Sponsored Content
    Partner Content
    The Industrialization of ESG Investment
    For institutional investors, ETFs can make meeting liquidity needs easier
    Gold: the most effective commodity investment
    2021 Investment Outlook | Investing Beyond the Pandemic: A Reset for Portfolios
    Ten ways retirement plan professionals add value to plan sponsors
    Gold: an efficient hedge
    View More
    E-MAIL NEWSLETTERS

    Sign up and get the best of News delivered straight to your email inbox, free of charge. Choose your news – we will deliver.

    Subscribe Today
    August 1, 2022 page one

    Get access to the news, research and analysis of events affecting the retirement and institutional money management businesses from a worldwide network of reporters and editors.

    Subscribe
    Connect With Us
    • RSS
    • Twitter
    • Facebook
    • LinkedIn

    Our Mission

    To consistently deliver news, research and analysis to the executives who manage the flow of funds in the institutional investment market.

    About Us

    Main Office
    685 Third Avenue
    Tenth Floor
    New York, NY 10017-4036

    Chicago Office
    130 E. Randolph St.
    Suite 3200
    Chicago, IL 60601

    Contact Us

    Careers at Crain

    About Pensions & Investments

     

    Advertising
    • Media Kit
    • P&I Content Solutions
    • P&I Careers | Post a Job
    • Reprints & Permissions
    Resources
    • Subscribe
    • Newsletters
    • FAQ
    • P&I Research Center
    • Site map
    • Staff Directory
    Legal
    • Privacy Policy
    • Terms and Conditions
    • Privacy Request
    Pensions & Investments
    Copyright Ā© 1996-2022. Crain Communications, Inc. All Rights Reserved.
    • Topics
      • Alternatives
      • Consultants
      • Coronavirus
      • Courts
      • Defined Contribution
      • ESG
      • ETFs
      • Hedge Funds
      • Industry Voices
      • Investing
      • Money Management
      • Opinion
      • Partner Content
      • Pension Funds
      • Private Equity
      • Real Estate
      • Russia-Ukraine War
      • SECURE Act 2.0
      • Special Reports
      • White Papers
    • Rankings & Awards
      • 1,000 Largest Retirement Plans
      • Top-Performing Managers
      • Largest Money Managers
      • DC Money Managers
      • DC Record Keepers
      • Largest Hedge Fund Managers
      • World's Largest Retirement Funds
      • Best Places to Work in Money Management
      • Excellence & Innovation Awards
      • WPS Innovation Awards
      • Eddy Awards
    • ETFs
      • Latest ETF News
      • Fund Screener
      • Education Center
      • Equities
      • Fixed Income
      • Commodities
      • Actively Managed
      • Alternatives
      • ESG Rated
    • ESG
      • Latest ESG News
      • The Institutional Investor’s Guide to ESG Investing
      • ESG Sustainability - Gaining Momentum
      • Climate Change: The Inescapable Opportunity
      • Impact Investing
      • 2022 ESG Investing Conference
      • ESG Rated ETFs
    • Defined Contribution
      • Latest DC News
      • DC Money Manager Rankings
      • DC Record Keeper Rankings
      • Innovations in DC
      • Trends in DC: Focus on Retirement Income
      • 2022 Defined Contribution East Conference
      • 2022 DC Investment Lineup Conference
    • Searches & Hires
      • Latest Searches & Hires News
      • Searches & Hires Database
      • RFPs
    • Performance Data
      • P&I Research Center
      • Earnings Tracker
      • Endowment Returns Tracker
      • Corporate Pension Contribution Tracker
      • Pension Fund Returns Tracker
      • Pension Risk Transfer Database
      • Future of Investments Research Series
      • Charts & Infographics
      • Polls
    • Careers
    • Events
      • View All Conferences
      • View All Webinars
      • 2022 Retirement Income Conference
      • 2022 Managing Pension Risk & Liabilities
      • 2022 WorldPensionSummit