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.
"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 Lewis R. Clayton, partner in the New York firm of Paul, Weiss, Rifkind, Wharton & Garrison, said his firm no longer represents the company.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.
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.
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.