MINNEAPOLIS - Ceridian Corp. could end up paying more than $69 million for miscalculating lump-sum payments made to 12,000 employees laid off in the late 1980s if a U.S. District Court in Minneapolis upholds a federal judge's May 5 ruling.
The ruling also could make it harder for companies to make changes in their pension plan documents, especially if those retroactive amendments result in cutbacks in participant benefits.
At issue in the case - Kenneth Kiefer, Michael Doyle et al vs. Ceridian Corp. - is whether the Minneapolis computer company, previously known as Control Data Corp., deliberately used a higher interest rate than stated in its pension plan documents to calculate lump-sum payments for about 12,000 employees who had earned full pensions and lost their jobs when the company downsized in the late 1980s.
The calculation of lump sums -single amounts representing the present value of a stream of monthly pension payments at retirement age - involves complex assumptions about life expectancy and the rate at which assets are expected to grow. A high discount rate used to calculate the present value of the future benefits results in smaller payments because it assumes current assets will grow more rapidly to reach the projected amount at retirement age.
In their lawsuit, the former employees note the company used 120% of the Pension Benefit Guaranty Corp. interest rate to calculate their payments, rather than 100% of the rate as specified in its plan document, and changed its plan document after the fact to reflect that change.
The former employees are asking the court to force the company to pay them the difference as well as back interest and legal expenses.
That could amount to as much as $69 million plus interest, according to preliminary calculations by the company stated in financial documents filed with the Securities and Exchange Commission May 16. While any favorable judgment for the former workers would be paid out of the plan's assets, it also would hurt Ceridian's pocket because the computer-maker has an obligation to fund the plan and might have to contribute additional money to the plan to cover the cost.
"People used to think they could just retroactively amend the plan when the document didn't conform with their intent. This case puts the nail in the coffin of that concept," said a federal pension law expert who did not wish to be identified.
The former employees also allege the company failed to pay them back their own money, since they, not the company, had contributed the bulk of the money to the pension plan.
Ceridian's defined benefit pension plan, created in the 1970s, was structured so that employees contributed the bulk of the money. Employees paid in between $200 million and $220 million of the plan's $700 million-plus in assets (as of 1989) from their pre-tax salaries, while Ceridian contributed only $177 million, said Arthur T. Susman, partner in the Chicago law firm of Susman, Buehler & Watkins, one of the law firms representing the former employees. The remaining $300 million-plus in assets resulted from investment gains on the assets, he said. The plan's assets peaked at $730 million in 1989, according to company documents filed with the SEC.
In a May 5 ruling, U.S. District Court Judge Richard H. Kyle rejected the company's request to dismiss the case on grounds that Ceridian was simply fixing its pension plan to comply with 1986 tax law changes, which gave companies the option of using 120% of the prescribed PBGC interest rates to compute benefits in excess of $25,000. Ceridian also claimed the lawsuit should be thrown out because it was filed after the two-year statute of limitations.
Ceridian also contended that the attorney who drafted its pension plan document mistakenly stated the company would use the PBGC interest rate to compute lump sums, when in fact the company intended all along to use 120% of the rate. But the judge noted in his ruling that even if the company's pension plan violated the 1986 tax law changes, it did not have the right to make changes that would violate the Employee Retirement Income Security Act.
ERISA forbids companies from cutting back vested benefits unless it is through a plan amendment expressly permitted under the law.
Ceridian's former employees have "an extremely strong" case, Mr. Susman noted. "We said the company is not giving us back our own money" and the court agreed, he said.
In 1989, the company amended its pension plan to allow laid-off workers to take their retirement benefits in one shot instead of waiting until retirement to collect monthly payments. Previously the plan allowed lump-sum payments only to those who had earned benefits of $5,000 or less.
At the same time, the company also decided to incorporate changes permitted under the Tax Reform Act of 1986. The law allowed companies offering lump sums to use 120% of the PBGC rate for amounts more than $25,000, but did not require it. For lump sums of less than $25,000, the PBGC rate remained the ceiling.
In 1992, David A. McElvain challenged the company's calculation of his lump sum. When Michael E. Kotten, the company's vice president of compensation and benefits, denied his request for additional benefits, the former employee asked for a copy of the plan documents. The company sent him the documents, including a one-page document titled "Exhibit B," which described the method for calculating lump sums. Mr. Kotten also told Mr. McElvain that while the documents did not "expressly incorporate" the 120% rate, "these provisions have been so interpreted and consistently applied at all times."
When the former employee wrote back saying he had been sent an incorrect Exhibit B, and asked for the correct document, the company sent him a second, type-written document. According to court documents, when questioned by the employees' lawyers about the existence of two separate documents, Mr. Kotten admitted the exhibit had not been part of the plan document and had been typed up because of the request. And that, according to the ERISA expert who wished to remain anonymous, could be damning evidence against the company in the lawsuit.
Although Ceridian has asked the judge to let the case proceed to an appeals court without going to trial first, it is uncertain whether the judge will grant the request. If he denies the request, trial will start Aug. 26. If the May 5 ruling is upheld, Stephen J. Olson, Ceridian's general counsel said, the company "will eventually appeal."