No one knows where the Justice Department's investigation of alleged anti-competitive agreements among actuarial firms will lead, but it should hasten pension plan sponsors' refusal to accept unreasonable liability limits from the firms.
Some actuarial firms have been asking pension executives to accept limitations on firms' liabilities for damages stemming from mistakes in actuarial work, fraud or negligence.
Actuarial firms provide an essential service that plan sponsors have to rely on to properly fund pension benefits. Accepting limits on their liability for harm arising from errors isn't consistent with fiduciary responsibility or accountability.
Watson Wyatt & Co., Towers Perrin & Co., Milliman USA and Mercer Human Resources Consulting Inc. require their pension fund clients to accept liability caps. Hewitt Associates and Aon Corp. do not.
The Justice Department probe is connected to the issue of actuarial liability. Actuarial disputes can involve big money.
The Los Angeles County Employees Retirement Association sued Towers Perrin in 2001, seeking more than $2 billion in damages. An alleged under-calculation of the pension plan's projected liabilities caused $1.1 billion less to be contributed to cover those benefits. The suit was settled in 2003, although terms were not disclosed.
In 2000, Raytheon Co. accused Towers Perrin of errors in calculating benefit payment assumptions, and overvaluing surplus pension assets in regard to an acquisition of Hughes Aircraft Co. According to a Towers Perrin spokesman, a U.S. District Court judge dismissed some Raytheon claims, while ruling in Towers Perrin's favor on others. Raytheon appealed. The two parties then reached a resolution; terms were not disclosed. A Raytheon spokeswoman said the matter was resolved.
One issue in the Justice Department probe supposedly is whether huge judgments in lawsuits led actuarial firms to agree with one another to try to limit damages. Another issue is whether the firms have sought to limit liability because they participate in an insurance pool that covers lawsuit damages. Certainly, the Justice Department should take appropriate action if such a conspiracy is found.
Still, sponsors must hold actuarial firms accountable and shouldn't accept such unreasonable limits on their fiduciary responsibility. Had sponsors refused such stipulations, actuarial firms wouldn't have been able to impose them.
In fact, pension sponsors, especially ones with large plans, ought to make sure actuarial firms have the insurance and other support to cover appropriate damages for the scope of the actuarial work if a dispute arises. Pension trustees employ at their own peril actuarial consultants that prevail in imposing limits to liability.
Actuarial firms, on the other hand, have a point in seeking liability limits. Unlimited liability can ruin a firm and damage even an entire industry. Liability should be limited to the actuaries' work and not, for example, to accuracy of data that is the responsibility of plan sponsors. But the actuarial firms that seek such limits have not come forth publicly to argue their case.
Pension clients might well be willing to accept such modest limits on the actuarial firms' liabilities. But the actuarial firms' efforts to impose broader limits — whether independently by coincidence, or jointly — is unacceptable, and would not go far if sponsors refused to deal with firms seeking it.
The market is capable of sorting out those consultants willing to advise pension sponsors and prepared to stand by their work, if sponsors will do their part and refuse to agree to unreasonable caps.
