Pensions... the verdict is in!

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I posted about this case a couple of weeks back and the verdict is in: online.wsj.com/article/SB10001424052748704083904576333322334296368.html?mod=WSJ_hpp_sections_personalfinance

A new Supreme Court ruling makes some of the most significant changes in laws governing employee benefits in nearly two decades, though groups representing employers and employees disagree over who really comes out the winner.

The decision, announced on Monday, makes it possible for lower courts to award damages to employees or make them whole if they have suffered financial harm after an employer unlawfully denied their benefits or made misstatements about what they were entitled to receive.

The case, Amara v. Cigna, was brought on behalf of 25,000 Cigna Corp. employees who complained that the health-services company deceived them when it changed its pension plan in 1998. Cigna told them in handouts and meetings that the new plan was "an overall improvement in retirement benefits," when in fact it froze the pensions of older, long-tenured employees, in many cases for years.

In a 6-2 decision, the Supreme Court ruled that a lower court could award employees the benefit the company led them to believe they had.

The ruling could have broad repercussions not only in pension cases, but also for health-care, disability and other workplace benefits.

"It's a great day for plan participants," says Phyllis Borzi, assistant secretary of labor at the U.S. Department of Labor's Employee Benefits Security Administration, which filed a brief on behalf of Cigna employees. "The Supreme Court's decision goes a long way toward restoring common sense and basic fairness. When plan fiduciaries breach their duties and injure plan participants, simple justice demands a meaningful remedy."

But employers registered a victory as well. In a unanimous decision in the same case, the justices agreed with Cigna that when there is a conflict between documents given to employees containing the summary of the plan rules and the plan document, which employees rarely see, employees can't sue to enforce the terms of the summary, as the Cigna employees had done.

The court sent the case back to the lower court to reconsider its ruling.

"Cigna is pleased that the U.S. Supreme Court has ordered the lower court to reconsider its initial decision and undertake further proceedings in the case," said a spokeswoman in an emailed statement.

When Cigna made the transition to its new pension plan in 1998, it converted employees' existing benefits to a hypothetical lump sum, and made this the "opening account balance," which would grow by a percentage of pay each year.

But Cigna didn't disclose that the opening balances of many long-tenured employees weren't worth 100% of their old pension, but could be worth as little as 50% to 70%. This meant a pension wouldn't rise until the "pay credits" in the new pension built the old pension back to its 1998 value, which could take years.

Janice Amara, who was a lawyer in Cigna's compliance department, had earned a pension worth $1,833 per month at age 55. But the "opening balance" would have produced a pension of $900 per month, and could have become even smaller if interest rates fell.

Creating underwater opening balances is called "wear-away," because it is as if the employer told employees their prior pensions had been overpaid, so they would have to work off their debt, or "wear it away," before they got new compensation. The Pension Protection Act banned the widespread practice in 2006.

In Amara v. Cigna, a lower court in New Haven, Conn., in 2008 concluded that Cigna had deliberately provided misleading information to employees, and that "Cigna's successful efforts to conceal" the pension freeze deprived the employees "of the opportunity to take timely action," such as protesting at the time of the change, or "leaving Cigna for another employer with a more favorable pension plan."

In a decision upheld by the Second Circuit in 2009, the court ordered Cigna to provide the employees the benefit it led them to believe they were getting: 100% of the old pension, plus any new benefits they had earned.

Cigna appealed to the Supreme Court, saying the lower courts had no authority to award the benefits because employees were legally entitled only to the less-generous benefits described by the formal plan document, not the summary.

The justices agreed with Cigna that courts couldn't award a benefit that wasn't in the plan. But in an unexpected move in the closely watched case, the justices provided a way for courts to award a remedy despite this: They said that if an employer had breached its fiduciary duty to the employees, a court could order a trustee to amend the terms of the plan to conform to the terms in the summary.

"It gave the courts a roadmap," says Mary Ellen Signorille, senior attorney at AARP, which, along with the Department of Justice, had filed legal briefs on the employees' behalf.

This is a significant change. Since a 1993 Supreme Court decision written by Justice Antonin Scalia, many courts refused to make monetary awards for benefits lost as a result of violations of disclosure rules and fiduciary duties. This led to dozens of cases in which courts found that employers and plan trustees had behaved unlawfully or deceitfully, resulting in financial loss or death of the participants, yet faced no consequences.

"The Supreme Court has ruled that the era of rights with no remedy is over, and that employees should be made whole for inaccurate or misleading information about the benefits that they earn," says Stephen Bruce, who represented the Cigna employees.

The court also addressed the issue of what employees must do to qualify for relief. Cigna argued that to recover a remedy, each individual employee must prove he relied on the misinformation to his detriment. The court rejected this "detrimental reliance" standard. "It is not difficult to imagine how the failure to provide proper summary information, in violation of the statute, injured employees," Justice Stephen Breyer wrote.

Some attorneys say it will now be difficult, if not impossible, for employees to sue if the plan summary or other information employers give them is incomplete or incorrect, strengthening an employer's hand.

The Cigna case now returns to the lower court for reconsideration. Cigna employees, who originally filed the case in 1999, now must wait longer for a resolution. If they prevail, they could receive an estimated $70 million in pension benefits from the $3.2 billion plan.

Ms. Amara, now 61 years old and living in Middletown, Conn., says it has been a long road. "Hopefully, it will make a difference for people at Cigna and other companies," she says

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This led to dozens of cases in which courts found that employers and plan trustees had behaved unlawfully or deceitfully, resulting in financial loss or death of the participants, yet faced no consequences.

Huh? How can their behavior lead to the deaths of participants unless they offed them to cut down on their pension payouts?

I am happy with the verdict, though. Maybe now companies will be more transparent when they're cutting back benefits. As for the conflict between the summary and the plan, the whole plan document is always available on request. I have to admit, though, that I've never asked for one.

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I was glad to see that verdict also. I was concerned it would go the other way and continue to chip away at individual rights to favor big business. I think the quote about death was in reference to other cases where promised health insurance was unlawfully cut without any negative consequence to the business.

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May 21, 2011 7:20:05 GMT -5 resolution said:

I think the quote about death was in reference to other cases where promised health insurance was unlawfully cut without any negative consequence to the business.

OK, that makes sense. I know companies are trying really hard to get out of promises to pay for retiree health insurance. My own company used to keep you on the plan after retirement if you had 10 years in and were 55 or older when you left. Now they just provide you with a fixed amount every year that's frozen at something like 80% of what they pay for your insurance the year you leave. I have 9 years in and I'm 58, so I'm really hoping to collect that even though it's not as good as the previous deal.