Lawrence G. Ruppert and Thomas A. Larson, on behalf of themselves and all others similarly situated, Plaintiffs-Appellees,
Alliant Energy Cash Balance Pension Plan, Defendant-Appellant.
Argued April 3, 2013
Appeal from the United States District Court for the Western District of Wisconsin. No. 3:08-cv-00127-bbc — Barbara B. Crabb, Judge.
Before Posner, Wood, and Hamilton, Circuit Judges.
Posner, Circuit Judge.
This is an appeal by the defendant in a class action suit brought by participants in a cash balance defined benefit pension plan, alleging that the plan as administered violated ERISA, and seeking recovery of benefits denied the participants as a consequence of the violation. 29 U.S.C. § 1132(a)(1)(B). The district judge granted summary judgment in favor of the class—actually classes, because the judge divided the class into two subclasses: subclass A challenges the projection rate used by the defendant, subclass B the defendant's handling of the pre-mortality retirement discount. We explain these terms in due course.
The employee participating in a cash balance plan has a "notional" retirement account (notional because the individual account is not funded) to which every year the employer adds a specified percentage of the employee's salary plus interest at a specified rate on the amount in the account. If the employee remains employed by the plan sponsor until retirement age, either the balance in his notional retirement account will be used to purchase an annuity for him or, if he prefers, he can receive the cash balance as a lump sum.
But suppose the employee leaves the employ of the plan's sponsor before reaching retirement age. Between his leaving and his reaching retirement age his cash balance will grow because it will still earn interest every year. Critically so far as this case is concerned, that interest is an accrued benefit—an indefeasible entitlement. Thompson v. Retirement Plan for Employees of S.C. Johnson & Son, Inc., 651 F.3d 600, 602 (7th Cir. 2011); Berger v. Xerox Corp. Retirement Income Guarantee Plan, 338 F.3d 755, 758–59 (7th Cir. 2003). But if he leaves early and decides to take his retirement benefit as a lump sum at that time, ERISA provides that the lump sum will be not his current cash balance but the present value of the lump sum retirement benefit that he would be entitled to receive if he deferred receipt until he reached retirement age. 29 U.S.C. § 1054(c)(3); Thompson v. Retirement Plan for Employees of S.C. Johnson & Son, Inc., supra, 651 F.3d at 602; Berger v. Xerox Corp. Retirement Income Guarantee Plan, supra, 338 F.3d at 758–59; Esden v. Bank of Boston, 229 F.3d 154, 158–59 (2d Cir. 2000).
So calculating the lump sum entitlement of an employee who departs before reaching retirement age requires increasing his cash balance by the amount of interest he could expect to receive until retirement and then discounting the resulting increased cash balance to reflect the benefit of receiving money now rather than in the future. This opposed action of increasing the cash balance by future interest on it and then discounting that increased cash balance to present value is called "whipsawing." It involves projecting forward to the value of the retirement benefit at retirement age (moving up) and then discounting backward to the present (moving down), and thus resembles the action of a two-person saw (a "whipsaw"). Johnson v. Meriter Health Services Employee Retirement Plan, 702 F.3d 364, 367 (7th Cir. 2012); Esden v. Bank of Boston, supra, 229 F.3d at 159.
When a plan entitles participants to interest credits at a variable rate, as this plan does, the interest credits that would have accrued between the lump sum distribution that an employee who left early took and his reaching normal retirement age cannot be known for certain; they can only be estimated. The rate picked to estimate those interest credits is called the "projection rate." It will not generate an exact match to the interest credits because the variations in future interest credits cannot be known. But it must be a reasonable, good-faith estimate. Thompson v. Retirement Plan for Employees of S.C. Johnson & Son, Inc., supra, 651 F.3d at 609–10; Berger v. Xerox Corp. Retirement Income Guarantee Plan, supra, 338 F.3d at 760; Esden v. Bank of Boston, supra, 229 F.3d at 166– 67.
If the projection rate used to calculate the cash balance at retirement age is identical to the interest rate used to discount the cash balance to present value (the discount rate), the early retiree's lump sum is simply the cash balance on the date he leaves the employ of the plan sponsor. That was used in the defendant's 1998 retirement plan used to calculate the lump sum retirement benefits of the early retirees, the members of the projection-rate subclass. The plan administrator used the 30-year Treasury bond rate for both the projection rate and the discount rate. But the plan document had promised the plan participants an interest-crediting rate of 4 percent, or 75 percent of the plan's investment returns for each year in which an employee was accruing benefits, whichever was greater. The judge determined that the 30- year Treasury rate was not a reasonable estimate of the interest-crediting rate and thus of the future interest credits to which the plan entitled the participants. (The use of the 30- year Treasury rate as the discount rate was permitted by ERISA in 1998, 29 U.S.C. § 1055(g)(3) (1998), and so is not challenged.)
Once the judge decided that the projection rate had been too low, she had next to decide the damages that the class members had sustained. So she conducted a bench trial at which expert witnesses presented evidence of what would be the most reasonable projection rate. On the basis of the expert testimony, the judge concluded that it was 8.2 percent.
She rejected the plan's proposed method of calculating the projection rate (not a method advocated by any of the expert witnesses, however). The plan's method would have yielded a lower rate, hence a lower estimate of the future interest credits of the class members and thus a lower estimate of the present value of those credits. The method based the projection rate on a 1 to 5 year rolling average of the plan's past interest-crediting rates, beginning in 1998. The rate for 1998 would be the rate in just that year, the rate for 1999 would be the average rate in that and the preceding year; and so on until, beginning in 2002, the rate for each year would be the average of the rate in that year and the rates in the previous four years.
Rolling averages are a permissible method of estimating interest rates for cash balance plans. Thompson v. Retirement Plan for Employees of S.C. Johnson & Son, Inc., supra, 651 F.3d at 610 n. 17; Berger v. Xerox Corp. Retirement Income Guarantee Plan, supra, 338 F.3d at 760; Esden v. Bank of Boston, supra, 229 F.3d at 170; cf. Tr e a s. Reg. § 1.401(a)(4)-8(c)(3)(v)(B); 29 U.S.C. § 1054(b)(5)(B)(vi)(I). But of course there is no averaging when only one year is used to estimate the interest rate. The only reason the plan would have for choosing 1 to 5 years rather than just 5 years was to exclude all years before 1998. That arbitrary position—for of course the plan's annual rates of return for the five years preceding 1998 were known—was doubtless intended to exploit the fact that the plan, like most investors, had high earnings in the late 1990s—the years of the dot-com stock bubble—and low returns in 2000 through 2002 in the wake of the dot-com crash. By excluding most of the 1990s from the average, the defendant produced a lower estimate of the future interest credits owed the participants who took their lump sums in the early 2000s. The result of this discreditable gimmickry, properly rejected by the district judge, was to produce an average estimated projection rate of only 7.27 percent (and for some participants only 5.45 percent), significantly below the judge's 8.2 percent estimate.
The case should have ended there, but did not because in 2011, before any distribution of damages to the class, the defendant had amended the 1998 plan. The aim was to moot the lawsuit and by doing so reduce the defendant's damages. For the amended plan was retroactive. It purported to replace the rights that the class members had obtained in the lawsuit (the 8.2 percent projection rate) with the 1 to 5 year rolling average. But because the rolling average yielded interest rates below the 8.2 percent that ...