Court Rules Pension Plan Change Did Not Violate Law

Ruling: Northern Trust’s change in payout formula not an illegal reduction in accrued benefits.

A US court of appeals has ruled that a change in the benefit formula for a defined benefit pension plan is not an illegal cutback in accrued benefits and doesn’t constitute age discrimination. 

The case stems from a 2012 change financial services company Northern Trust made to its pension plan. Until then it had a defined-benefit plan under which retirement income was based on years worked, multiplied by an average of the employee’s five highest-earning consecutive years, times a constant. This is also known as the traditional formula. But under the amended plan, income was determined by multiplying the years worked and the high average compensation by a formula that depends on the number of years worked after 2012, not by a constant.

Out of concerns for upsetting workers who had relied on the traditional formula, Northern Trust offered people hired before 2002 a transitional benefit, treating them as if they were still under the traditional formula except that it would deem their salaries as increasing at 1.5% per year, regardless of the actual rate of change in their compensation.

James Teufel, the plaintiff in the lawsuit, contended that the amendment, even with the transitional benefit, violated the anti-cutback rule in the Employee Retirement Income Security Act of 1974 (ERISA). The anti-cutback rule states that the accrued benefit of a participant under a plan may not be decreased by an amendment to the plan. Teufel also argued that the amended plan harms older workers relative to younger ones, and therefore is in violation of the Age Discrimination in Employment Act (ADEA).

In its ruling, the court said that if Northern Trust had terminated the plan, calculated Teufel’s accrued benefit, and deposited that sum in a new plan with additions to come under the new formula, then Teufel would not have had any complaint, and he conceded this, according to court documents.

“What actually happened is more favorable to him,” said the court. “He gets the vested benefit as of March 2012 plus an increase in the (imputed) average compensation of 1.5% a year (for pre-2012 work) for as long as he continues working.”

The court shot down Teufel’s argument that the expectation of future salary increases should be treated as an accrued benefit, adding that the only benefit that had accrued was the sum due for work already performed.

“A reduction in the rate of salary increases could not violate ERISA, which does not require employers to increase anyone’s salary,” said the court.

The court also wasn’t swayed by Teufel’s claims of age discrimination. The argument was that the traditional formula is more valuable to older workers because the five highest-earning consecutive years are greater the older one gets, thus eliminating the formula harms older workers more than younger ones.

“We are skeptical about the proposition that curtailing a benefit correlated with age, and so coming closer to eliminating the role of age in pension calculations, can be understood as discrimination against the old,” said the court. “Kentucky Retirement Systems holds that a pension benefit for older workers does not violate the ADEA, but not that any such benefit, once extended, must be continued for life.”

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