Two prominent actuarial consulting firms - Watson Wyatt Worldwide, Washington, and Towers Perrin, Valhalla, N.Y. - are insisting their pension plan clients limit the firms' liability to one year's fees or no more than $250,000.
In addition, they are asking clients to indemnify the firms for damages beyond that amount when lawsuits are filed by participants or others involved with the plan.
The liability and indemnity restrictions are new as of Jan. 1.
Executives at Milliman USA, Vienna, Va., are considering adopting the limited liability provision; officials at The Segal Co., New York, are studying the situation. And, sources say William M. Mercer Inc. also is asking clients to accept limits on its liability, but a spokeswoman would not comment.
Corporate pension executives said they hadn't heard of these new efforts by actuaries to limit damages, and some questioned whether an indemnification clause would hold up in court if the actuaries were found to be a fiduciary to the pension fund.
Federal pension law forbids pension plans from shielding fiduciaries against liabilities. But in June 1993, the U.S. Supreme Court ruled in Mertens vs. Hewitt Associates that participants could not sue non-fiduciaries - such as actuaries, accountants and attorneys - for knowingly participating in a breach of fiduciary duties.
A Labor Department official who did not wish to be identified said the effort by actuaries to shield themselves from huge court judgments is "troubling." In particular, the official worried about the indemnification clause. "Are they really going to give you the best quality if they are indemnified?" the official asked. The Labor Department will be willing to clarify the issue if pension plans seek advice on the matter, the official said.
The moves follow a spate of multimillion lawsuits over the consultants' actuarial work in recent years.
Milliman's review was prompted by its insurance company, which is threatening to yank the consulting firm's coverage or raise its deductible by millions of dollars if it does not adopt such provisions, said Tom Custis, national director for pensions, in the firm's Brookfield, Wis., office. Milliman will decide next month whether to ask clients to limit its liability to an equivalent of two or three years' fees. The firm has no plans to adopt an indemnification clause for routine actuarial work, Mr. Custis said.
Union funds object
Labor union funds are up in arms.
Trustees of the Central Pension Fund of the International Union of Operating Engineers and Participating Employers, Washington, last week decided to look for a new actuarial consultant after Watson Wyatt presented the new clauses, said Michael R. Fanning, chief executive of the fund. The $6.5 billion fund's three-year contract with Watson Wyatt expires Jan. 31, but the firm has agreed to continue with the fund under the existing contract's terms until a new firm is hired.
Trustees also decided to ask the Labor Department's pension office for guidance on whether acceptance of such clauses could cause trustees to violate their fiduciary duties.
In a Jan. 15 letter, Frank Hanley, general president of the International Union of Operating Engineers, asked all local plans to "vehemently oppose any attempt by actuarial firms to escape from liability for their own negligence."
William Dale, managing partner in the Washington law firm of McChesney & Dale PC, which represents several union funds, said three funds received a request from Watson Wyatt to add the provisions in their consulting contracts; he expects all three will reject the provisions within the next month.
Joyce Mader, a partner at the Washington law firm of O'Donoghue & O'Donoghue, which represents more than 120 pension plans, mostly union funds, also is asking clients to reject such clauses and search for new consultants. Ms. Mader said she was "outraged" at the actuaries' efforts to limit liability in case of screwups.
Meanwhile, the Washington-based National Coordinating Committee for Multiemployer Plans, which represents about 650 Taft-Hartley funds, also might ask the Labor Department's pension office to clarify the issue, said Randy DeFrehn, executive director.
"This is totally unacceptable. You have to be able to rely on your professionals and their advice and have the confidence in them that if they make a mistake they are willing to stand behind it," he said.
A Towers Perrin spokesman said no pension fund clients have objected to the new provisions in their contracts, although one TP executive said the firm did stop doing work for a small pension fund that refused to accept the provisions.
And Eric P. Lofgren, global director of the benefits consulting group at Watson Wyatt, Philadelphia, said the firm has had a policy on its books of insisting on formal "letters of engagement" from all clients, but only recently has begun asking pension funds to sign them. "We frankly think that what we are proposing is fairly mainstream here," he said.