GREENVILLE, S.C.- Bowater Inc. could shell out as much as $5 million in additional benefits in a dispute over a cash balance plan it inherited from Georgia-Pacific Corp. when it purchased Great Northern Paper Inc.
Georgia-Pacific acquired Great Northern in a hostile takeover in 1990; participants of the subsidiary were included in its cash balance pension plan. Bowater bought Great Northern in 1992. Bowater then sold its Great Northern subsidiary to a Canadian company, Inexcon Maine Inc., in August 1999.
Bowater's pension plan had approximately $531 million in assets as of June 30, 2000, the latest date for which information is available.
A lawsuit - Crosby vs. Bowater Inc. Retirement Plan for Salaried Employees - was filed Oct. 22 in a federal district court in Grand Rapids, Mich., claiming Bowater miscalculated lump-sum benefits for approximately 350 Great Northern employees who lost their jobs after Bowater sold the company.
There have been several lawsuits in recent years alleging miscalculation of lump-sum benefits from cash balance plans to be paid to departing employees. But this is the first time participants have challenged a company's factoring in the probability that the participants might die before they turn 65. That's important because the value of an accrued benefit in a cash balance plan, like that in traditional defined benefit plans, is based on the pension at retirement age - commonly 65. If a cash balance plan permits it, departing employees younger than 65 may opt to take as a single payment the present value of the pension at age 65.
Bowater allowed employees of its Great Northern subsidiary to take their retirement benefits as a lump sum. Pension plans typically cut off monthly pension checks when a participant dies, but under the Great Northern cash balance plan, beneficiaries of those who had opted for a one-time payment were still eligible for the full lump sum, according to Eva T. Cantarella, partner in the Bloomfield Hills, Mich., law firm of Hertz, Schram & Saretsky, which represents the plaintiffs.
Plaintiffs argue that while it would have been reasonable for Bowater to assume the probability of death on pensions payable at retirement age, it was wrong to apply a "mortality discount" to the calculation of the lump-sum benefits for workers younger than 65 who were laid off when Bowater sold Great Northern.
For example, if Bowater had not applied a probability of death before retirement age to the lump sum it paid out Frank J. Crosby, he would have received $57,262.98 instead of $52,013.90
In their complaint, plaintiffs also claim federal pension law forbids employers from reducing an accrued benefit. "A lump sum is an accrued benefit and is not forfeitable," Ms. Cantarella said.
Ms. Cantarella also represented participants in the dispute over Georgia-Pacific Corp.'s cash balance plan. (Pensions & Investments, Aug 21, 2000) In that case, Georgia-Pacific simply gave departing employees, as a lump sum, what they had built up in their hypothetical accounts under the cash balance plan. It did not project the balances to pensions at retirement age and then discount them back to arrive at the present value.
Julie Hofemann, treasury analyst at Bowater, said the company does not comment on lawsuits.
It is standard practice for employers to assume some probability of death for former employees who collect lump-sum payments before they hit age 65, said Adam J. Reese, a consulting actuary with Towers Perrin in Arlington, Va.
"The entitlement is at age 65; they don't have to take it (at a younger age)," he said, explaining that cash balance plans are pension plans, not defined contribution plans that give workers full access to their retirement savings when they quit a job.
"It (the mortality discount) is going to be a big issue to a lot of (plan sponsors)," said Hubert V. Forcier, partner in the Minneapolis law firm of Faegre & Benson LLP.
Companies could have to pay out as much as 10% more to workers who quit at 45, and up to 11.5% more to workers in their mid-20s, if a court decides companies cannot use the mortality discount, according to an analysis by Mr. Forcier.
But, he said, while the IRS overlooked the mortality discount in guidance it issued in 1998, an earlier ruling had specifically permitted it.
A spokesman for the IRS confirmed that companies can incorporate life expectancies in calculating lump sum benefits for participants who have not yet reached retirement age.
Moreover, sources say that unless a pension plan specifies it, the beneficiaries of a single employee who dies before reaching 65 would not be entitled to any benefits, and a spouse would be entitled to only a portion of the benefit.
What's more, a lump sum paid out after a married participant's death is legally a "death" benefit, not a retirement benefit, sources said.
"This case is going to depend ultimately on what the plan (document) says," said Norman Stein, a pension lawyer who teaches at the University of Alabama, Tuscaloosa.