Charles v. Pepco Holdings, Inc. , 314 F. App'x 450 ( 2008 )

Opinions of the United
2008 Decisions States Court of Appeals
for the Third Circuit
11-4-2008
Charles v. Pepco Holdings Inc
Precedential or Non-Precedential: Non-Precedential
Docket No. 07-4044
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NOT PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
__________
No. 07-4044
__________
J. MICHAEL CHARLES; MAURICE W. WARD, JR.;
JOSEPH I. FINK, JR., on behalf of themselves and
all others similarly; THOMAS S. TROUP,
Appellants
vs.
PEPCO HOLDINGS, INC; CONECTIV;
PEPCO HOLDINGS RETIREMENT PLAN,
On Appeal from the United States District Court
For the District of Delaware
(Civ. Nos. 05-cv-00702 & 06-cv-00010)
District Court Judge: Honorable Sue L. Robinson
___________
Argued on September 22, 2008
___________
Before: BARRY, AMBRO and GARTH, Circuit Judges,
(Opinion Filed: November 4, 2008)
James R. Malone, Jr. (Argued)
Joseph G. Sauder
Timothy N. Mathews
Pamela S. Tikellis
A. Zachary Naylor
Scott M. Tucker
Chimicles & Tikellis LLP
361 W. Lancaster Avenue
Haverford, PA 19041
Attorneys for Appellants
Kay Kyungsun Yu
Larry R. Wood, Jr.
Barak A. Bassman
Pepper Hamilton LLP
3000 Two Logan Square
Eighteenth and Arch Streets
Philadelphia, PA 19103-2799
Attorneys for Appellees
Susan K. Hoffman (Argued)
Darcy W. Krause
Littler Mendelson PC
Three Parkway
1601 Cherry Street
Philadelphia, PA 19102
Attorneys for Appellees
___________
OPINION
___________
GARTH, Circuit Judge:
This appeal arose out of the conversion of Plaintiffs’ “defined benefit” pension
plans into a “cash balance” plan. J. Michael Charles, Maurice W. Ward, Jr., Joseph J.
Fink, Jr., and Thomas S. Troup (collectively, “Plaintiffs”) filed two separate class actions
against Pepco Holdings, Inc., Conectiv, and Pepco Holdings Retirement Plan
(collectively, “Defendants”) alleging that the conversion violated the Employee
Retirement Income Security Act of 1974 (“ERISA”). The two actions, Charles v. Pepco
Holdings and Troup v. Pepco Holdings, were consolidated on July 20, 2006.
Although the original complaints raised various claims, only one issue remains at
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dispute on appeal: whether Defendants violated section 204(h) of ERISA by failing to
provide timely and adequate notice of the “cash balance” amendment.1 Because we find
that notice was not required, we need not decide the questions of timeliness or adequacy.
Accordingly, we will affirm.
I.
Prior to 1998, Plaintiffs were beneficiaries of “defined benefit” pension plans at
Atlantic City Electric Company and at Delmarva Power & Light Company. The two
companies merged in March 1998 to form Conectiv,2 and on April 23, 1998, the new
Board of Directors amended the pension plans and adopted a “cash balance” plan,
effective January 1, 1999. This “cash balance” plan provided employees with a
hypothetical account balance that accrued pay credits and interest credits, the latter of
which was tied to the 30-year Treasury Bond rate.3 Certain employees remained eligible
to be “grandfathered” under the old pension plan, but Plaintiffs were not among them.
1
Plaintiffs also argued on appeal that Defendants violated the anti-backloading
requirement under section 204(b)(1) of ERISA, but conceded in their reply brief and at
oral argument that IRS Revenue Ruling 2008-7, issued on February 1, 2008, disposed of
this claim. We therefore do not address backloading. Plaintiffs’ complaints also alleged
violations of sections 204(b)(1)(G) and 204(b)(1)(H) of ERISA, but these issues were
dismissed by the District Court and were not raised on appeal.
2
On August 1, 2002, Conectiv became a wholly owned subsidiary of Pepco
Holdings.
3
For a more complete description of “cash balance” plans, and how they differ
from traditional “defined benefit” plans, see Register v. PNC Fin. Servs. Group, Inc., 477
F.3d 56, 60-61 (3d Cir. 2007).
-3-
Having adopted the amended plan on April 23, 1998, Conectiv mailed a “Facts”
newsletter and a decision kit to its employees in May 1998, informing them of the
amendment to the pension plan and explaining the “cash balance” plan. Additional letters
with similar content were circulated in December 1998 and again in June 1999.
On December 10, 1999, the Vice President of Human Resources approved a
finalized version of the amended plan “pursuant to the adoption of the Plan by the
Personnel & Compensation Committee of the Board of Directors . . . on April 23, 1998.”
J.A. 861.
In September 2005, Plaintiffs commenced litigation proceedings challenging the
validity of the new pension plan under ERISA. On September 19, 2007, the District
Court granted summary judgment for the Defendants. Plaintiffs filed a timely notice of
appeal.
II.
We exercise plenary review over the District Court’s grant of summary judgment.
McGowan v. NJR Serv. Corp., 423 F.3d 241, 244 (3d Cir. 2005). Jurisdiction is
predicated on 28 U.S.C. § 1291, which provides that “[t]he courts of appeals . . . shall
have jurisdiction of appeals from all final decisions of the district courts of the United
States.” The District Court had federal question jurisdiction under 28 U.S.C. § 1331.
At the time of the amendment, section 204(h) stated that a pension plan
may not be amended so as to provide for a significant
reduction in the rate of future benefit accrual, unless, after
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adoption of the plan amendment and not less than 15 days
before the effective date of the plan amendment, the plan
administrator provides a written notice [to each participant].
29 U.S.C. § 1054(h)(1) (1997-2001).4 Under this provision, notice was required only if
the amendment was “reasonably expected to [significantly reduce] the amount of the
future annual benefit commencing at normal retirement age . . . taking into account the
relevant facts and circumstances at the time the amendment was adopted.” 26 C.F.R.
§ 1.411(d)-6T (1996).
Accordingly, two principles are relevant in determining whether the plan
amendment led to a “significant reduction,” such that notice was required. The first is
that each plaintiff, as distinct from a group or class, must show that he or she personally
would experience such a significant reduction. The second is that the Treasury
4
As we recently held in Register:
The district court concluded that [the defendant] satisfied the
section 1054(h) notice requirements applicable at the time of
the conversion and we agree. The brochure set forth the plan
amendment and the effective date. That explanation was all
that was required. Contrary to appellants’ argument, the
Treasury Regulations at the time of the amendment were clear
that [the defendant] was not required to discuss “how the
individual benefit of each participant or alternate payee will
be affected by the amendment.”
477 F.3d at 73 (quoting 26 C.F.R. § 1.411(d)-6T (1996)) (emphasis added). Although
section 204(h) was later amended in 2002 to require a more robust form of notice, this
amended requirement was not in effect in 1998. Id. at 72 n.14; Gillis v. SPX Corp.
Individual Account Ret. Plan, 511 F.3d 58, 63 n.4 (1st Cir. 2007).
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Regulations in effect at the time the plan was amended, April 23, 1998, differed
materially from the 204(h) regulation.
Under the Regulations in effect on April 23, 1998, “an amendment to a defined
benefit plan affects the rate of future benefit accrual only if it is reasonably expected to
change the amount of the future annual benefit commencing at normal retirement age [of
65].” 26 C.F.R. § 1.411(d)-6T (Q&A 5) (emphasis added). Importantly, this
determination must “tak[e] into account the relevant facts and circumstances at the time
the amendment is adopted.” Id. (Q&A 7) (emphasis added). Thus, in determining
whether no significant reduction was to be reasonably expected, and therefore no need for
notice to be given, the District Court examined the individual Plaintiffs’ benefits and the
relevant facts and circumstances as of April 23, 1998.
The parties dispute the appropriate method for calculating the impact of the “cash
balance” amendment. At trial, Defendants’ expert witness, Ethan Kra, calculated that
future benefits at retirement for each individual would be expected to increase under the
new “cash balance” plan if salaries were held constant at 1999 levels. His calculations
were based on the facts and circumstances knowable as of April 23, 1998.5 Plaintiffs
attacked Kra’s assumption that wages would experience zero growth, and offered instead
their own expert analysis showing that future benefits decreased when using a 4.5%
5
Defendants recited these calculations in two charts, both of which showed
appreciable increases under the “cash balance” plan for each of the four Plaintiffs. See
Appellees’ Br. 28.
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salary growth assumption (a figure used in Defendants’ 1999 SEC filings for aggregate
labor costs).6
We are not convinced by the projections provided by Plaintiffs’ expert, Claude
Poulin. We find Kra’s analysis on the whole to be more persuasive. 7 Poulin’s
assumption that Defendants’ labor costs would increase by 4.5% each year from 1999
until the Plaintiffs retired at age 65 does not explain why management employees’ future
salaries could be expected to keep pace with the company’s labor costs for all employees.
See note 6, supra. Nor does Poulin explain how, on April 23, 1998, Defendants were to
reasonably predict each of the Plaintiffs’ salaries until each of their respective
retirements. Indeed, in the preceding five-year period from 1994 to 1999, one Plaintiff
saw nearly zero wage increase, from $56,237.84 to $56,824.37, and another received
average wage increases of only 1.4% per annum, from $59,267.75 to $63,522.62.8
6
The aggregate labor costs included wages of union workers, who were not
covered under this pension plan. Plaintiffs also attempted to project future wage growth
based on actual salary data from 1999 to 2006, but this information would not have been
available in 1998 when the amendment was adopted.
7
The dissent accuses us of engaging in “status quo bias,” but the dissent ignores
the fundamental fact that Plaintiffs had (and failed to meet) the burden of proof. See,
e.g., Dissenting Op. 5 (suggesting instead that Defendants had the burden to justify the
reasonableness of relying only on knowable wage figures). Plaintiffs have provided no
basis in the record to establish the reasonableness of any alternative wage growth rate.
8
The dissent correctly notes that the other two Plaintiffs in this case happened to
see higher wage increases over this time period. But that does not diminish our
underlying point that wage growth is inherently unpredictable, and varied greatly even
among these Plaintiffs. See also David Leonhardt, Next Victim of Turmoil May Be
Your Salary, N.Y. Times, Oct. 14, 2008 (reporting that median pay in 2008 is lower than
-7-
Having determined that the “cash balance” amendment would not have been
reasonably expected to result in a “significant reduction in the rate of future benefit
accrual,” we need not address the issue of whether the “Facts” newsletter, the decision
kit, and the additional letters constituted timely and adequate notice. The regulations, as
we have stated, provided that no notice was required.
III.
For the foregoing reasons, we will affirm the District Court’s order filed
September 19, 2007.
it was in 2000, and noting that it may end up more than 5 percent lower by 2010).
-8-
AMBRO, Circuit Judge, dissenting
Introduction
Plaintiffs-Appellants are management employees of Conectiv who worked for
Delmarva Power & Light or Atlantic City Electric Company. They were participants in
“average highest pay” defined benefit pension plans, meaning plans that calculated
benefits based on an average of highest pay levels achieved by participants over their
careers. Conectiv merged the plans and in 1999 converted the merged plan to a cash
balance plan. Plaintiffs sued in 2005, alleging, among other things, that the amendment
violated ERISA’s requirement that plan participants receive notice of certain plan
amendments. 29 U.S.C. § 1054(h). My colleagues in the majority believe no notice was
required. I do. Moreover, I believe the notice given was both untimely and inadequate. I
thus respectfully dissent.
The Employee Retirement Income Security Act of 1974 (“ERISA”) requires that
pension plan sponsors give notice to plan participants before amending their plans in
ways that should be expected to reduce significantly their benefits. Since the level of
pension benefits depends in part on wages, whether a significant reduction is expected
depends on guesses about future wage levels. The majority’s opinion relies on the belief
that because we are not clairvoyant, we must assume that things will stay the same.
Because of that belief (which, I assert, is incorrect), the majority prefers an assumption of
zero wage growth over one of positive wage growth in comparing the old and new plans.
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Doing so strays from textbook pension valuation practice and defeats the purpose of
comparing future benefits under the two plans. Zero wage growth is not a reasonable
expectation and Conectiv makes no allegations to challenge Plaintiffs’ showing that,
assuming 4.5% wage growth (the figure used by Conectiv itself in a Form 10-K filing
with the Securities and Exchange Commission), a “significant reduction” in the rate of
benefit accrual under the new plan should reasonably have been expected.
Not only do I believe notice was required to Plaintiffs , I believe that notice was
untimely because the amendment was not adopted before its effective date. The bullet
summary “adopted” by Conectiv prior to the amendment’s effective date lacked essential
details, such as pay and transition credit rates. I also believe that the notice was
inadequate because it did not tell participants that they might reasonably expect their
benefits to be reduced by the amendment.
Discussion
Reading together 29 U.S.C. § 1054(h) and the relevant regulations as they
appeared during the conversion to the cash balance plan, notice is: (1) necessary if a
significant reduction in benefits could be reasonably expected to result from the
amendment;9 (2) timely if it comes after adoption but more than 15 days before the
9
A defined benefit plan “may not be amended so as to provide for a significant
reduction in the rate of future benefit accrual, unless ... the plan administrator provides a
written notice ....” 29 U.S.C. § 1054(h). “Whether an amendment provides for a
significant reduction in the rate of future benefit accrual ... is determined based on
reasonable expectations taking into account the relevant facts and circumstances at the
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effective date of the amendment;10 and (3) adequate if it contains the effective date and a
summary of the amendment written in a manner calculated to be understood by the
average plan participant.11
Significant Reduction
Whether a significant reduction reasonably may be expected turns on the wage
growth assumption used in estimating future benefit accrual. Plaintiffs use a 4.5% annual
growth rate to show a reduction in the rate of future benefit accrual. Defendants use a 0%
wage growth rate to show an increase in the rate of future benefit accrual. Compare JA
1797 with JA 0630.
Both the majority and the District Court hold that zero wage growth is the proper
assumption. Their position contradicts textbook pension valuation practice and judicial
opinions, makes meaningful comparison of plans impossible, and ignores Conectiv
counsel’s concession at oral argument that a positive wage growth assumption is
time the amendment is adopted.” 26 C.F.R. § 1.411(d)-6. Q&A 7.
10
Notice is required “after adoption of the plan amendment and not less than 15
days before the effective date of the plan amendment....” 29 U.S.C. § 1054(h).
11
The plan administrator must provide “a written notice, setting forth the plan
amendment and its effective date to...each participant in the plan....” 29 U.S.C. §
1054(h)(1996). “The notice does not fail to comply with section [1054(h)] merely
because the notice contains a summary of the amendment, rather than the text of the
amendment, if the summary is written in a manner calculated to be understood by the
average plan participant and contains the effective date. The summary need not explain
how the individual benefit of each participant or alternative payee will be affected by the
amendment.” 26 C.F.R. § 1.411(d)-6. Q&A 10.
-11-
necessary. We should hold that a 4.5% wage growth rate assumption was reasonable
because Conectiv used this rate in projections of growth in its aggregate labor cost.
The majority’s holding rests on separate grounds from that of the District Court.
The latter relied on the statute’s backloading provision, which states that “social security
benefits and all other relevant factors used to compute benefits shall be treated as
remaining constant as of the current year for all years after the current year.” 29 U.S.C. §
1054(b)(1)(B)(iv); Charles v. Pepco Holdings, Inc., 513 F. Supp. 2d 47, 54 (D. Del.
2007).12 The majority relies on Conectiv’s argument13 on appeal that, since the future is
not knowable, it is reasonable to expect that things will stay the same. As a result, zero
wage growth is a reasonable assumption in predicting rates of benefit accrual before and
after an amendment. Both grounds are flawed.
Addressing the second ground first, if we assume that the future is unknowable,
12
This is a reconstruction of the District Court’s brief comments on this issue. See
Charles, 513 F. Supp. 2d at 54–55. The Court first noted that plaintiffs assumed salary
increases while Conectiv did not. It then stated that “[c]onsistent with its conclusions
regarding ERISA § 204(b)(1)(B) [29 U.S.C. § 1054(b)(1)(B)], the court concludes that
defendant’s expert employed the more appropriate methodology to determine whether, at
the effective date of the amendment (January 1999), Plaintiffs’ rate of future benefit
accrual would be significantly reduced under the Cash Balance Plan.” Id. at 54. The
Court stated that since Conectiv’s calculations (using the zero wage growth assumption)
had not themselves been challenged, there was “no probative evidence of record” to
support Plaintiffs’ claim. Id. at 54–55. The response to this reasoning is addressed
below.
13
Conectiv states that predicting the effect of an amendment on the rate of future
benefit accrual “can only be done on the basis of data existing at the time of the
amendment’s adoption, as no Plan sponsor possesses the clairvoyance necessary to know
the course of future events.” Appellee’s Br. 29.
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then in theory we must conclude that anything is possible. There is no reason why we
should privilege the current wage rate over any other rate.14
Although the future is not knowable with certainty, many physical, social, and
economic phenomena, including wage growth, behave in ways that can be predicted with
various levels of accuracy.15 Actuaries use data concerning “relevant facts and
circumstances” available in the present to produce cost-of-living predictors, mortality
tables and salary scales that represent best estimates of future values of pension valuation
variables, including wages. See Dan M. McGill et al., Fundamentals of Private Pensions
609 (8th ed. 2005) (“McGill”); cf. Maj. Op. 6 (stating that “importantly,...determination
[of future benefit rates] must take into account the relevant facts and circumstances at the
time the amendment is adopted”)(internal quotations omitted)(emphasis in original).
Since there is no reason a priori why such estimates for wage growth should be zero,
Conectiv must provide some empirical justification for why a zero wage growth
assumption is reasonable.
14
The majority’s reasoning is a species of “status quo bias” in human cognition.
See, e.g., William Samuelson, et al., Status Quo Bias in Decision Making, 1 J. Risk and
Uncertainty 7 (1988).
15
People often rely on predictions that the status quo will not continue into the
future. When a baseball player times a fly ball, he relies on his predictions of changes in
the rate of movement (speed) of the ball. Not being clairvoyant does not mean that it is
reasonable for him to assume that once the ball leaves the bat it will continue out of the
stadium at a constant speed forever. The player’s experience with fly balls combined
with the experience of generations of players tell him that there are far more reasonable
predictions. The same is true for wage rates.
-13-
In fact, a zero wage growth assumption is generally unreasonable because wages
typically grow over time. A leading pensions textbook states that “[c]ost-of-living
increase assumptions in current use generally range from 2 percent to 3 percent” and that
“[a]ctuaries usually assume that increases in average compensation will exceed the
assumed increase in prices by 0 to 2 percent.” McGill at 609–10.16 That means that in
general actuaries assume wage growth of between 2% and 5%, not 0%.
Ignoring wage growth affects the benefit accrual rate under highest pay defined
benefit plans, such as those being compared with the cash balance plan in this case. The
two highest pay plans at issue here calculate benefits as an increasing function of average
pay over the five consecutive years of highest pay.17 As a result, valuing benefits without
taking into account future pay increases reduces estimates of future benefits.
Textbook pension valuations of highest pay plans take the sensitivity of average
pay plans to wage levels into account by assuming wage growth. In the section on
16
The publisher, Oxford University Press, advertises that: "For almost five
decades, [McGill] has been the most authoritative text and reference book on private
pensions in the world." Listing on
http://www.us.oup.com/us/catalog/general/subject/Finance/Investments/?view=usa&ci=0
199269505 (last visited Oct. 9, 2008).
17
The Delmarva Power & Light Company Retirement Plan calculated benefits as
an increasing function of average pay over the consecutive five-year period of highest
compensation. JA 1155 (defining “Average Annual Earnings” for purposes of
calculating the Normal Retirement Benefit of Non-Bargaining Unit Employees). The
Atlantic City Electric Company Retirement Plan calculated benefits as an increasing
function of average pay over the consecutive five-year period of highest compensation in
the ten years preceding retirement. JA 1198 & 1204 (defining “Average Annual
Compensation” for purposes of calculating the Normal Retirement Benefit).
-14-
"Valuation Assumptions and Factors" for plans, McGill states that
if the retirement benefits of a pension plan are expressed in terms of final
average or highest average earnings, it is necessary to project the current
earnings of plan participants to the level expected to prevail during the
period of service that will establish the formula salary base—usually the
years immediately preceding retirement.... Compensation for an individual
participant...is projected through an assumption about the annual rate at
which the individual's compensation will increase over his or her future
working lifetime.
McGill at 609 (emphasis added). This treatise cites to an article stating that
[t]he salary scale is of prime importance in the calculation of liabilities for
pension plans provided for salaried employees. Since the compensation of
these employees [i.e., employees in average earnings plans, as in this case]
is customarily increased year by year to match increasing responsibilities, it
follows that the pension liabilities are similarly increased, and, in fact, that a
proper estimate of the liabilities for the pensions cannot be made without an
attempt to forecast the salary increment.
William F. Marples, Salary Scales, 14 Trans. Soc. Actuaries no. 38, pt. 1 at 1-2 (1962),
-15-
cited in McGill at 609 n.12.
The sensitivity of highest pay plans to wage growth assumptions is so significant
that, if our Court were to adopt a zero-wage-growth rule, it would permit employers to
carve an entire class of plan amendments out of the notice requirement. Any reduction
in benefits that could be accomplished by altering the wage parameter used in the benefit
formula would be “invisible” to a court in testing for significant reductions in future
benefits. For example, an employer could reduce benefits by amending a final pay plan
to become a lowest pay plan by changing the benefit equation to use a participant’s
lowest pay over his career as the base for computing pension benefits. Assuming lowest
pay of $40,000 and final pay of $70,000, such a change would reduce annual pension
benefits at retirement by 43%. Cf. Amara v. Cigna Corp., 534 F. Supp. 2d 288, 338 (D.
Conn 2008) (“switching from a final or highest average formula to a career average pay
formula itself is almost guaranteed to cause a substantial reduction in future benefits, and
in fact such a result is commonsensical”). However, a court following the majority’s
approach would hold that no reduction in benefits can reasonably be expected under the
amendment. Cf. Appellant’s Reply Br. 5–6 (showing how an employer who reduced
benefits by 5.3% by changing the wage formula used in calculating benefits under a final
pay plan would appear under a zero wage growth rule to have not reduced benefits at
all).
-16-
Courts have acknowledged both the reality of wage growth and the importance of
taking it into account in valuing benefits in traditional defined benefit plans. Hirt v.
Equitable Retirement Plan, 441 F. Supp. 2d 516, 520 (S.D.N.Y. 2006), points out that
“[t]he principal feature of...defined benefit plans was to weight the compensation earned
by participants in their late, pre-retirement years, for these, generally, were the years of
highest salaries or commissions.” In Amara, the Court relied in part on an expert report
provided by the plan sponsor that assumed 4.5% annual salary increases in holding that
an amendment converting a three-year final average pay plan into a cash balance plan
was expected to reduce benefits significantly. Amara, 534 F. Supp. 2d at 338.
Plaintiffs estimate benefits using the future growth rate in aggregate labor costs
assumed by Conectiv in its 1998 and 1999 financial statements. Appellant’s Br. 32; JA
1791. This is reasonable because: (1) the growth rate in aggregate labor costs takes into
account the growth of wages of non-union management employees; and (2) future rate
projections used by the plan sponsor itself carry weight because the sponsor’s access to
data and actuarial expertise makes it best situated to develop accurate estimates of future
growth.
Conectiv challenges Plaintiffs’ growth assumption on the ground that aggregate
labor cost growth reflects growth in union wages.18 But despite being the party in the
18
I would be remiss if I did not note that the unions involved here did not accept
amending their highest pay plan to a cash balance plan. Defs.’ Answering Br. Opp'n
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best position to identify that evidence, Conectiv does not allege that non-senior
management employees such as Plaintiffs in fact experience wage growth significantly
different from growth in aggregate labor costs. See Appellee’s Br. 30 (stating only that
Conectiv used 4.5% wage growth to “project pension funding obligations for its entire
workforce”). Absent such a showing, aggregate wage growth is a reasonable predictor
of Plaintiffs’ wage growth.
Conectiv argues that “[n]owhere...do Plaintiffs explain how, in 1998, Conectiv
was supposed to be able to predict Plaintiffs’ salaries over the next seven years with
pinpoint accuracy....” Appellees’ Br. 31. To predict a Plaintiff’s wage growth rate with
“pinpoint accuracy,” as Conectiv would have the Court require, is not prediction, but
clairvoyance. Every prediction is a generalization about the fate of a class or group of
similarly situated individuals. Since we do not know the future for certain, we cannot
precisely identify how each individual fares. The better the prediction, the smaller the
class to which our prediction applies and the closer we come to differentiating fully each
individual’s fate. But no prediction succeeds completely. Cf. Hirt, 441 F. Supp. 2d at
541 (stating that “[u]ncertainty in determining expected benefits is inevitable, due to
fluctuations in salary levels, [etc.]....”); see generally Nicholas Rescher, Predicting the
Pls.’ Mot. Class Certification 3, Charles, No. 05-702 (D. Del. Feb. 16, 2007). Indeed,
only non-union middle-management, estimated by Plaintiffs to number a few hundred,
got stuck with the new plan. Opening Br. Supp. Pls.’ Mot. Class Certification 11,
Charles, No. 05-702 (D. Del. Jan. 11, 2007); but see JA 0051 (cash balance plan covered
certain management and unionized employees). Senior management is covered under the
old plans or under an executive retirement plan. JA 1369–71.
-18-
Future: An Introduction to the Theory of Forecasting (1997).
The majority suggests that a zero wage rate is a reasonable expectation because
“in the preceding five-year period from 1994 to 1999, one Plaintiff saw nearly zero wage
increase, from $56,237.84 to $56,824.37, and another received average wage increases
of only 1.4% per annum, from $59,267.75 to $63,522.62.” Maj. Op. 7. Extrapolating
future wage growth rates for four Plaintiffs over the roughly 15 or more years remaining
until they reach retirement age by examining five years of wage growth history for two
of them will produce very weak predictions. A small sample size such as the one used
by the majority can be highly inaccurate because, among other reasons, wage rates
sometimes plateau temporarily as workers move from one pay grade to another. See,
e.g., William F. Marples, Salary Scales, 14 Trans. Soc. Actuaries no. 38AB, pt. I at 2
(1962) (“In the larger employments, for consistent and equitable control of salary
increments, it has been the practice to establish grades within which progression from
the minimum to the maximum salary for the grade occurs in stipulated increments related
to the period of service within the grade. The effect on the salary history of the
individual employee is a steady increase in compensation with age, with occasional
‘flats’ while a move from one grade to the next is awaited.”).
The majority does not explain why it disregards data for two other Plaintiffs.
Those Plaintiffs, Maurice Ward and Thomas Troup, experienced large increases in salary
over the same period. Ward’s salary jumped from $58,872 to $69,132 and Fink’s from
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$53,092 to $66,034, increases of approximately 3.3% and 4.5% per year, respectively.
JA 0647 (listing yearly wages for each such Plaintiff from 1994 through 1999 on which
annual percentage increase calculations are based). The effect of the majority’s omission
of this data is to bias its conclusions in favor of low wage growth.
Unlike the majority, the District Court did not engage in reasonable expectations
analysis because it thought that a zero wage growth assumption was mandated by text in
the backloading statute. That conclusion is wrong. There is no support for a zero wage
growth assumption in the statute or implementing regulations. Assumptions required in
testing for backloading are not the same as those required in calculating rates of future
benefit accrual. ERISA’s anti-backloading test seeks to determine whether, all else
equal, benefit increases of an unacceptable degree are sensitive to increases in age alone.
See Rev. Rul. 2008-7, 2008 WL 274325. It therefore holds wage rates (along with
everything else but age) constant and compares benefits levels at different ages.
The goal in testing for a significant reduction in future benefits is not to isolate
the influence of a single variable such as age, but to compare “reasonable expectations”
about how much money plan participants will get in the future under two plans. This
requires comparing the behavior of two formulas (average highest pay and cash balance)
under reasonable assumptions about changes in the variables (e.g., compensation and
mortality) on which they are based. This explains why Congress placed language
holding variables constant in a subsection of the backloading provision, but not in any
-20-
part of the notice provision. Compare 29 U.S.C. § 1054(b)(1)(B)(iv) with 29 U.S.C. §
1054(h).
At oral argument, Conectiv’s counsel conceded that a zero wage growth
assumption is inappropriate and neither suggested an alternative nor challenged
Plaintiffs’ growth rate assumption.19 Because the 4.5% growth rate used by Plaintiffs
was reasonable and the only alternative growth assumption proffered by Conectiv was
not, the District Court should, I believe, have granted summary judgment as a matter of
law on this issue in favor of Plaintiffs rather than Conectiv.20
19
Judge Ambro: “It would be ludicrous not to assume that there is growth in
earnings. That’s the way America works.”
Susan K. Hoffman, Counsel for Conectiv: “Judge Ambro, I will accept your premise that
it is reasonable to assume some pay increase.”
20
Notes 7 and 8 of the majority opinion assert that I miss its underlying point that,
because wages are inherently unpredictable, using the current wage rate in projecting
future benefits is reasonable. See Maj. Op. 7–8 nn. 7–8. This misses my critique of that
position. My contention is that if wages are unpredictable, then neither the current wage
rate nor any other is a reasonable predictor of future wages. To maintain that the current
wage rate is the proper assumption in calculating future benefits, the majority must mean
that wages are predictable. Specifically, they must believe that the current wage rate is a
reasonable predictor of future wages. But that is an empirical claim in support of which
Conectiv has not pointed to any evidence. As I explain in the body of this dissent,
actuarial practice and the courts accept that wages exhibit a positive trend. The fact that
median income fell from 2000 to 2008 does not undermine a positive trend assumption in
1998 or 1999. The drop is the “first time on record that income failed to set a new record
in an economic expansion.” David Leonhardt, Next Victim of Turmoil May Be Your
Salary, N.Y. Times, Oct. 14, 2008.
The majority further argues that I place the burden of proof on Conectiv. I do not.
Plaintiffs have the burden of proof and have met it by pointing to 4.5% aggregate labor
cost growth projected by Conectiv in its SEC filing. Although the majority may not find
Conectiv’s SEC filing persuasive (a question that is not at issue on summary judgment),
-21-
If the majority is uncertain whether Plaintiffs’ 4.5% assumption is reasonable
because there may be a significant divergence between union and non-union wage
growth, as Conectiv suggests, our only option, in view of the inappropriateness of a zero
growth assumption, is to remand to the District Court for further findings of fact on the
appropriate wage growth assumption. Record evidence that should be required on
remand includes: (1) opinions of economists and pension actuaries concerning the proper
wage growth assumption; and (2) any information, including reports and projections,
developed by Towers Perrin and Watson Wyatt for Conectiv in connection with the cash
balance plan conversion.
With respect to the latter, the District Court quashed subpoenas of Towers Perrin
and Watson Wyatt after Conectiv objected that such information was irrelevant.
Conectiv argued that the “reasonable expectations” standard is objective and as such
does not turn on Conectiv’s subjective expectations or state of mind. Br. Supp. Pls.’
Mot. for Continuance Pursuant to Fed. R. Civ. P. 56(f) or Preclusion Order at 5–7,
Charles, No. 05-702 (D.Del. Sept. 4, 2007). The District Court should have permitted
discovery of projections and other materials relating to future benefits prepared by
professionals because these are relevant to establishing “reasonable expectations,” even
they cannot claim, as they do, that “Plaintiffs have provided no basis in the record to
establish the reasonableness of any alternative wage growth rate.” Maj. Op. 7 n. 7. The
SEC filing is such a basis and Conectiv has produced no evidence to rebut it. Arguing
that a divergence might exist between union and middle-management, non-union wage
growth rates sufficient to skew aggregate labor cost growth does not count.
-22-
under an objective standard. Cf. George v. Duke Energy Retirement Cash Balance Plan,
560 F. Supp. 2d 444, 482 (D.S.C. 2008) (reciting descriptions of analyses by consultant
discovered by plaintiffs that reflected future benefits reductions and which plaintiffs
considered relevant to “significant reduction” analysis); Amara, 534 F. Supp. 2d at 300,
306 (citing to materials used by outside consultants that planned conversion to cash
balance plan, although not in the context of “reasonable expectations”).
Given its access to relevant data, resources, institutional experience, and incentive
to forecast its own future liabilities accurately, a plan sponsor, as noted, is often in the
best position to predict future benefits at the time an amendment is adopted. That makes
its expectations relevant to an objective inquiry into reasonable expectations. The
irrelevance of subjective expectations means only that a sponsor’s materials need not be
the final word in any reasonable expectations inquiry.
Using the 4.5% growth assumption, Plaintiffs calculate that the amendment could
be reasonably expected to cause reductions in their monthly benefits at retirement age
ranging from 14% to 37%. JA 1797; JA 0975.21 Since Plaintiffs’ growth assumption
was reasonable and benefits under that assumption decreased under the amendment, I
believe the majority should have examined whether the decreases were “significant.”
Congress has provided no guidance in this context on the meaning of
“significant.” Courts have not articulated a rule, though they appear to know a
21
Percentages provided here are lower than those in the record because they are
recalculated as percentage reductions, i.e., using benefits under the old plan as base.
-23-
significant reduction when they see it. See Davidson v. Canteen, 957 F.2d 1404, 1407
(7th Cir. 1992) (reduction in benefits of almost $13,000 and over $17,000 per year for
life significant); Amara, 534 F. Supp. 2d at 338 (reduction significant where some
participants experienced reductions of 29% or 45% under different interest rate
assumptions); Koenig v. Intercontinental Life, 880 F.Supp. 372, 376 (E.D.Pa. 1995)
(reduction in projected benefits of between 22% and 32% significant); Copeland v.
Geddes Fed. Sav. & Loan Ass’n Ret. Income Plan, 62 F. Supp. 2d 673, 677 & n.5
(N.D.N.Y. 1999) (reduction from $458.34 per month until age 65 and $5.00 per month
thereafter to $266.87 per month until age 65 and nothing thereafter is significant).
At oral argument, Conectiv claimed that “if the fact of a decrease [in relative
benefits] at all depends upon your pay increase assumption, then that is not a significant
reduction.” There is no support for such a rule in the statutes or regulations. Given the
sensitivity of highest pay plans to wage growth assumptions, such a rule would permit
large reductions in benefits to count as insignificant. As discussed above, it would
effectively exempt an entire class of plan amendments from the notice requirement.
Rather than choose that rule, courts should anchor their analyses by reference to
the purpose of the “significant reduction” standard, which is to trigger notice. They
should ask whether the reduction is such that a plan participant would want notice of the
reduction. A reduction of pennies per month is not significant. A reduction of $100 per
month is likely significant for participants with small monthly benefits. In close cases,
-24-
the opinion of experts concerning the economic burden of the reduction will be relevant.
But this is not a close case. Reductions of between 14% and 37% are significant. As in
the decisions noted above, I know a significant reduction when I see one. Summary
judgment in favor of Plaintiffs, or at least a remand, is warranted on this issue.
Timeliness
Notice must be timely. It is so if it comes after adoption but more than 15 days
before the effective date of the amendment. 29 U.S.C. § 1054(h) (Notice is required
“after adoption of the plan amendment and not less than 15 days before the effective date
of the plan amendment....”).
A committee of Conectiv’s board “adopted” the cash balance plan “in
substantially the same form presented in the attachment” on April 23, 1998, more than
15 days before the January 1, 1999, effective date. But the attachment does not contain
the final version of the cash balance plan. Rather, it contains a bullet summary that does
not contain specific pay, interest, and transition credit percentages, among other terms
necessary to calculate benefits under the new plan.22 There is no evidence in the record
22
The attachment contains the following text under the heading “Cash Balance
Pension Plan”:
! Effective: 1/1/99
! Basic formula is: End of Year Balance = Beginning of Year
Balance + Pay Credits + Interest Credits
! Portable - after 5 year vesting
! Improved employee communications
! Survivor receives the “balance”
! Extensive “Grandfathering”
! Transition Credits
-25-
that the final version of the amendment existed at the time the plan was adopted. Cf. JA
0788–89 (employee who worked on the plan conversion stating that he assumes that the
document reached its final form in December 1999, nearly a year after Conectiv made
effective the cash balance plan).
The statute’s requirement that adoption precede notice and the amendment’s
effective date ensures that participants have a fixed target to which they can respond.
See Curtiss-Wright v. Schoonejongen, 514 U.S. 73, 82 (1995) (“Requiring every plan to
have a coherent amendment procedure ...increases the likelihood that proposed plan
amendments, which are fairly serious events, are recognized as such and given the
special consideration they deserve.”). Adoption reduces oversight costs for participants
because it provides them with a signal for when heightened vigilance is warranted and
authoritative information regarding what management intends to do.
The bullet summary adopted on April 23, 1998, does not constitute adoption of
the amendment for purposes of satisfying the notice requirement because the bullet
summary was a moving target. It did not fix interest credit, pay credit, or transition
credit percentages that a participant would need to determine whether the amendment
would reduce benefits. Cf. Normann v. Amphenol, 956 F.Supp. 158, 165 (N.D.N.Y.
1997) (rejecting notice because it did not mention specific numbers adopted in the
! Business Link
! Useful in Divestitures
! Can be differentiated by SBU.
JA 0826.
-26-
amendment). It also did not indicate whether union employees would be covered by the
plan, a fact that would have been useful to non-union employees such as Plaintiffs in
determining whether the amendment was good for them.
It does not make a difference that the Facts newsletter and Decision Kit mailed to
employees after April 23, 1998, but before the effective date, contained specific pay,
interest, and transition credit percentages. See JA 0257; JA 1330–34. Since the board
did not adopt the numbers in these notices in April, 1998, and the notices themselves
purport to describe rather than to be the plan amendment, they provide an ambiguous and
incomplete signal of management’s intentions rather than the fixed target adoption
requires.
Conectiv argues that adoption of amendments with general terms is permissible.
However, in none of the cases it cites is specificity of terms at issue. See Appellee’s Br.
37–38. At oral argument, Conectiv’s counsel noted that in Haigler v. CIGNA Corp., No.
8:04-CV-851-T-30, 2006 WL 196936 (M.D. Fla. Jan. 24, 2006), the Court approved
adoption of an amendment containing a single line of text. Unlike in this case, that
single line contained the specific percentage necessary to gauge the amendment’s effect
on the rate of benefit accrual. Id. at *4.
Certification of the actual amendment text on December 10, 1999 (over 11
months after the purported effective date) did not retroactively ratify adoption.
Permitting such ratification would defeat the purpose of requiring adoption and notice
-27-
before the amendment becomes effective. In addition, ratification does not apply
because it is “prohibited where the amendment retroactively reduces the intervening
rights of third parties, such as plan participants.” Depenbrock v. Cigna Corp., 389 F.3d
78, 83 (3d Cir. 2004) (holding impermissible the ratification of cash balance plan
conversion amendment because participant had right to receive benefits under pre-
amendment plan); Schoonejongen v. Curtiss-Wright, 143 F.3d 120, 124–25 (3d Cir.
1998).
As the amendment was not adopted on April 23, 1998, or apparently at any time
before its effective date of January 1, 1999, notice of its adoption could not have been
provided more than 15 days before its effective date. As a result, I believe timely notice
was not given. See, e.g., Copeland v. Geddes, 62 F. Supp. 2d 673, 678 (N.D.N.Y. 1999)
(notice after effective date untimely).
Adequacy
Notice was also inadequate. It is adequate if it contains the effective date and a
summary of the amendment written in a manner calculated to be understood by the
average plan participant.23 The purpose of the notice requirement is to ensure that plan
23
The plan administrator must provide “a written notice, setting forth the plan
amendment and its effective date to...each participant in the plan....” 29 U.S.C. §
1054(h). “The notice does not fail to comply with section [1054(h)] merely because the
notice contains a summary of the amendment, rather than the text of the amendment, if
the summary is written in a manner calculated to be understood by the average plan
participant and contains the effective date. The summary need not explain how the
individual benefit of each participant or alternative payee will be affected by the
amendment.” 26 C.F.R. § 1.411(d)-6. Q&A 10.
-28-
participants can defend their interests. See, e.g., Canteen, 957 F.2d at1409. As a result,
notice must cause participants to become aware of the interests that the amendment
affects. See Schoonejongen, 514 U.S. at 83 (“[O]ne of ERISA’s central goals is to
enable plan beneficiaries to learn their rights and obligations at any time.”); Hirt, 441 F.
Supp. 2d at 538 (rejecting notice because “[i]n order to understand the reductions in
benefits that would result from its application...participants would have had to have
performed sophisticated calculations and comparisons,” and stating that “[a] notice is
intended to give fair warning and fails to do so if it is cryptic, or requires research
beyond the document itself”). Notice that does not make clear to participants, either
directly or through inferences that the average plan participant can be expected to draw,
what interests the amendment affects is not adequate.
Notice must make plan participants aware that benefits can be expected to be
reduced under the amendment. This is so because benefits are a participant’s principal
interest with respect to a plan and notice is itself triggered when an amendment can be
expected to reduce benefits significantly.
Only notice that explicitly tells participants that their benefits can be expected to
be reduced is calculated to be understood by the average plan participant. Absent such a
statement, promotional materials that discuss only advantages of the amendments and
meetings convened to respond to cash balance plan criticism are not notice. Taking
actions that might induce suspicious participants to seek expert help, through which they
-29-
might then learn that benefit reductions are to be expected, is not notice. What is needed
is a plain English statement both simple and direct that the cash balance plan will affect
at least some of the participants by reducing their retirement benefits.
Several courts have held or implied that notice must contain some warning of
expected benefit reductions. In Amara, the Court held that there was misrepresentation
sufficient to violate the notice requirement where notices contained numerous statements
such as “each dollar’s worth of credits is a dollar of retirement benefits payable to you
after you are vested. Under the plan, your benefit will grow steadily throughout your
career as credits are added to your account.” The Court noted the absence of any
warning about future benefit reductions. 534 F. Supp. 2d at 340; compare JA 0256–63,
0265–69, 1330–34 (in which Conectiv’s notices used similar language to that in Amara,
such as: “Throughout your Conectiv career, your account grows through additional
yearly company contributions, plus interest. When you retire, the current cash value of
your account is yours.”); see also Hirt, 441 F. Supp. 2d at 538. Indeed, here the District
Court stated that “some discussion of the possible adverse affects of the controversial
pension plan would have been in order.” Charles, 513 F. Supp. 2d at 55 n.10.
Our Court’s ruling in Register v. PNC Financial Services, 477 F.3d 56 (3d Cir.
2007), does not preclude the requirement that notice must contain some warning about
benefit reductions. Register held only that notice that did not do “more than tell the
participants that the new plan ‘may affect the future rate of benefit accruals’[,] and ‘in
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some instances may reduce the rate of future Pension Plan benefit accruals,’” was
adequate. Register, 477 F.3d at 73 (emphasis added). While it rejected a requirement
that plan sponsors “explain to...participants that the conversion would ‘significantly
reduce[] the rate of future pension plan benefit accruals for each plan participant,’” the
Court did not state that notice omitting warning that an amendment “may reduce the rate
of future...benefit accruals” would pass muster. Id. at 73.
Conectiv’s notice was inadequate because it did not warn of potential benefit
reductions. None of the seven notices24 identified by Conectiv contained a warning of
potential benefit reduction such as that present in Register. See Appellee’s Br. 10–16.
Conectiv might argue that The Wall Street Journal articles provided to some employees,
and a July 1999 meeting convened to address criticism of cash balance plans in the press,
were sufficient to notify Plaintiffs of the negative effect on their pensions. See
Appellee’s Br. 15–17, 19. Convening meetings to allay concerns is not a statement that
benefit reductions could be expected as a result of the amendment. Notice is not a
vehicle for plan promotion or justification but rather for sober disclosure.25
24
The notices were those of: October 13, 1997 (JA 0246); October 20, 1997 (JA
0252); May 1998 (two notices) (JA 1330-34, JA 0256–63); December 21, 1998 (JA
0265-69); June 23, 1999 (JA 0271-72); and July 1999 (JA 0274-80).
25
Although the District Court did not reach the issue, Conectiv argues on appeal
that Plaintiffs’ claims are barred by the statute of limitations. Appellees’ Br. 48–55. The
question whether Plaintiffs complied with the statute of limitations is closely related to
notice analysis because the statute of limitations only accrues when the employee learns
or should have learned that the amendment brought about a “clear repudiation” of rights
under the plan. Romero v. Allstate, 404 F.3d 212, 223 (3d Cir. 2005) (holding that
-31-
Conclusion
Notice was required because zero wage growth is an untenable assumption and,
absent evidence to the contrary, Conectiv’s own 4.5% aggregate labor cost growth
projection is reasonable. Notice could not have been timely because the bullet summary
of the amendment that was “adopted” before the effective date was insufficiently
detailed and the actual amendment does not appear to have been adopted until after the
effective date. In any event, notice was not adequate because it failed to state in plain
English that the cash balance plan could affect at least some of the participants by
reducing their retirement benefits. I respectfully dissent.
accrual should not be unwaveringly tied to effective date).
It is difficult, I submit, for the statute of limitations to accrue in benefit reduction
cases without a direct statement from the plan sponsor that benefits are being reduced.
This is so because average participants cannot be expected to become aware of
reductions by inspection of old and new plan terms or benefit formulas. See Hirt, 441 F.
Supp. 2d at 538. Short of a direct statement from the sponsor, the only way a participant
can become aware of a reduction is by chancing upon the opportunity to compare her
benefits with those she would receive under the old plan. Cf. In re JP Morgan Chase
Cash Balance Litigation, 460 F. Supp. 2d 479, 484 (S.D.N.Y. 2006)(limitations period
could accrue at retirement rather than effective date).
Plaintiffs allege that they became aware of the reductions in 2004 through
communication with employees who remained under the old plan. Appellant’s Br. 42.
They filed suit in 2005, allegedly within the three-year limitations period. See Charles,
2006 WL 1652749 (D.Del. 2006) (parties agree on three-year limitations period).
Conectiv does not allege that Plaintiffs became aware of the reduction in their future
benefits at any earlier date. It argues instead that access to articles critical of cash
balance plans in general, and statements by Plaintiffs that they worried about the effect of
the amendment in 1999, place the suit outside the limitations period. Appellee’s Br.
52–54. Suspicion and access to critical media does not necessarily amount to awareness
that the amendment could be expected to reduce benefits. Because this issue was not
addressed either by the District Court or the majority, I would remand it to the District
Court.
-32-