Brengettsy, Frank M. v. LTV Steel ( 2001 )

In the
United States Court of Appeals
For the Seventh Circuit
No. 00-2204
Frank M. Brengettsy, on his own behalf
and that of all others similarly situated,
Plaintiff-Appellant,
v.
LTV Steel (Republic) Hourly Pension Plan, et al.,
Defendants-Appellees./1
Appeal from the United States District Court
for the Northern District of Illinois, Eastern Division.
No. 98 C 5742--Charles P. Kocoras, Judge.
Argued December 6, 2000--Decided February 28, 2001
Before Bauer, Posner, and Williams, Circuit Judges.
Posner, Circuit Judge. This class action suit
under ERISA was filed by a retired employee of
the LTV Steel Company. The principal defendants
are two pension plans sponsored by LTV and the
plaintiff’s union (a detail we can ignore), one a
defined benefit plan and the other a defined
contribution plan. The district court granted
summary judgment for the defendants and also
denied class certification.
A defined benefit plan entitles the plan
participant to a specified pension benefit,
usually based primarily on his years of service
and his wages, payable to him periodically for
the rest of his life (or often his and his wife’s
life). The benefits under LTV’s defined benefit
plan are paid out of a trust that LTV
established. A defined contribution (often called
a "profit sharing") plan is different. See
generally Hughes Aircraft Co. v. Jacobson, 525
U.S. 432, 439-41 (1999); 1 Jeffrey D. Mamorsky,
Employee Benefits Law: ERISA and Beyond sec.sec.
1.01-.02, 2.01 (2000). It specifies the
contributions that the employer is required to
make to the plan participant’s defined
contribution account, but the value of the plan
to the participant depends on the investment
performance of the account. Under LTV’s defined
contribution plan, the employee may liquidate the
account when he retires, or later if he wishes.
When he decides to liquidate it, the account is
valued on the basis of the current market value
of the investments in it. Depending on the size
of the account, the participant cannot take it
all in cash, but must use some of the account to
purchase an annuity from one of several insurance
companies designated by the plan. An annuity is
purchased for cash and yields a fixed annual
return for the life of the annuitant (or, often,
annuitant plus spouse). It thus provides the same
type of benefit as a defined benefit plan, the
only difference being that annuities are sold by
insurance companies.
LTV’s two plans are integrated in what is
commonly referred to as a "floor offset" (or,
less commonly, a "feeder") arrangement. See Lunn
v. Montgomery Ward & Co., 166 F.3d 880 (7th Cir.
1999); Pritchard v. Rainfair, Inc., 945 F.2d 185,
187-90 (7th Cir. 1991); Holliday v. Xerox Corp.,
732 F.2d 548 (6th Cir. 1984); Regina T.
Jefferson, "Rethinking the Risk of Defined
Contribution Plans," 4 Fla. Tax Rev. 607, 669-70
(2000). (Other forms of integration, for example
with workers’ compensation benefits, are
permitted, see, e.g., Alessi v. Raybestos-
Manhattan, Inc., 451 U.S. 504, 514-17 (1981);
Lunn v. Montgomery Ward & Co., supra, 166 F.3d at
884, but are not involved in this case.) Under
that arrangement, the amount of the defined
benefit is determined in part by the value of the
retiree’s defined contribution account.
Concretely, LTV’s defined benefit plan specifies
a gross and a net pension entitlement (we are
simplifying a bit, but without affecting the
legal analysis), and the retiree’s defined
contribution account is used to help fund the
gross entitlement, the dollar value of which is
the floor in the floor arrangement. The plans’
administrator computes the annuity value of the
defined contribution account, that is, the size
of the annuity that could be purchased for the
employee with the entire balance in his account.
That is a hypothetical calculation; no annuity
need be purchased at this juncture. Suppose the
gross pension entitlement, the "floor," specified
in the defined benefit plan is $200 a month and
the hypothetical annuity that could be purchased
with the entire balance in the defined
contribution account would yield $50 a month.
Then the defined benefit to which the retiree
would be entitled would be $150 a month, that
being the amount necessary to bridge the gap
between the annuity value of the defined
contribution account and the gross pension
entitlement, the latter being, to repeat, the
minimum amount to which he is entitled, the
floor, in other words, specified in the defined
benefit plan. If the retiree decides to defer the
liquidation of his defined contribution account,
then the annuitized value of that account, which
must be determined in order to fix the defined
benefit to which he is entitled, is determined on
the basis of the value of the account and the
price of annuities on the date of his retirement.
Why this complicated method of determining the
retirement benefit? Why not in our example just
specify a defined value of $200 and not bother
with a defined contribution plan? Were there only
a defined benefit plan, and the defined benefit
(for an employee of given salary and years of
service) was $200 a month, the employee’s only
entitlement would be to that periodic payment. It
is here that the character of the gross pension
entitlement as a floor becomes significant. With
the two integrated plans, the retired worker gets
$150 plus the money in his defined contribution
account. If he uses all that money to buy an
annuity, and does so when he retires, he will
have two annuity-type benefits that add up to
$200 a month. But if he prefers, he can elect to
take just the $150 defined benefit and allow his
defined contribution account to grow, and when he
decides to liquidate that account he can take
some of it in cash rather than having it all
converted to an annuity. So the substitution of
the two different types of plan for one plan,
while not increasing the expected value of the
participant’s retirement benefits, gives him more
flexibility in the form and timing of the
benefits; and if he is lucky he will end up with
a gross retirement benefit that exceeds his gross
pension entitlement, the $200 in our example,
while if he is unlucky his fall is broken by the
floor.
The plaintiff’s complaint focuses on the
possible discrepancy between the annuitized value
of a retiree’s defined contribution account on
the date of his retirement and that value when he
decides to liquidate the account, which as we
have noted he can defer doing. The price of an
annuity is inverse to interest rates. The higher
those rates, the cheaper an annuity yielding a
given benefit will be, because the insurance
company can earn a higher income from investing
the purchase price of the annuity the higher
interest rates are. For a given price of an
annuity, therefore, the higher the interest rate
the higher the annuity’s yield to the annuitant,
and therefore for a given sum available to buy an
annuity the monthly benefits generated by the
purchase of the annuity will be greater the
higher the interest rate when it’s purchased. The
plaintiff retired on the last day of 1995 but did
not liquidate his defined contribution account
until July of the following year. Apparently,
interest rates fell during this interval, because
the annuitized value of his account declined, and
as a result the expected value of his retirement
benefit (the sum of the defined benefit
determined back in December and the benefit the
plaintiff could have gotten by using the full
assets in his defined contribution account in
July to buy an annuity) fell. The floor turned
out to be a ceiling.
It is difficult, however, to understand what
injustice resulted. By waiting to liquidate his
defined contribution account, the plaintiff was
speculating on interest rates. If he wanted
certainty, he should have liquidated the account
when he retired. Against this he argues that the
pension plan takes two or three months to
liquidate a defined contribution plan. That seems
long, but it is not a violation of the plan, and
anyway the plaintiff has no standing to complain,
since he waited seven months after retiring to
request that his account be liquidated.
Injustice or not, since he received the full
benefits to which the plan documents entitled
him, he has no basis for complaining of a
violation of the terms of the plan or a
forfeiture of vested benefits. 29 U.S.C. sec.sec.
1053(a), 1132(a)(1)(B); Alessi v. Raybestos-
Manhattan, Inc., supra, 451 U.S. at 512. No
amendment to the plans curtailed his benefits, so
he cannot appeal to the anti-cutback provision of
ERISA either. 29 U.S.C. sec. 1054(g). His
argument that because the price of annuities
changes with interest rates the plan is amended
every time the administrator recalculates
entitlements on the basis of those changes is
frivolous. Dooley v. American Airlines, Inc., 797
F.2d 1447, 1452 (7th Cir. 1986); Krumme v.
Westpoint Stevens, Inc., 143 F.3d 71, 85-86 (2d
Cir. 1998). He is left with the argument that the
defined benefit plan is not qualified for
favorable tax treatment under the Internal
Revenue Code because the benefits it provides are
not "definitely determinable." 26 U.S.C. sec.
401. He has no right to make this argument, see,
e.g., Reklau v. Merchants National Corp., 808
F.2d 628, 631 (7th Cir. 1986); Stamper v. Total
Petroleum, Inc. Retirement Plan, 188 F.3d 1233,
1238 (10th Cir. 1999); Abraham v. Exxon Corp., 85
F.3d 1126, 1131 (5th Cir. 1996); Crawford v.
Roane, 53 F.3d 750, 756 (6th Cir. 1995), the
effect of which if it succeeded would not be to
benefit him but to hurt the company, the trust,
and maybe other participants and beneficiaries by
killing the plans’ tax exemption. See 26 U.S.C.
sec.sec. 402(a), (b), 404(a)(5); Ludden v.
Commissioner, 620 F.2d 700 (9th Cir. 1980); 1
Mamorsky, supra, sec. 3A.01[1][a]. A more
plausible suit would be one complaining that by
failing to maintain tax-exempt status a
retirement plan had hurt the participants!
Anyway the plaintiff’s argument has no merit.
The Internal Revenue Code does not require that
the defined benefit be fixed, but only that it be
determinable according to criteria specified in
advance that do not permit the plan to play
favorites. 26 U.S.C. sec. 401(a)(25); 26 C.F.R.
sec. 1.401-1(b)(1)(i). Since it is the
participant’s choice when to liquidate the
defined contribution plan, the deferral option is
not a form of favoritism.
We take it that the appeal from the denial of
class certification was intended to be
conditional on the plaintiff’s prevailing on the
merits, since otherwise class certification could
only hurt the class. See Aiello v. Providian
Financial Corp., No. 00-1864, 2001 WL 101533 at
*4 (7th Cir. Feb. 6, 2001); Amati v. City of
Woodstock, 176 F.3d 952, 957 (7th Cir. 1999). The
defendants could have pressed for certification
on their own, to maximize the value of their
prevailing, but they have not done so, and it is
too late for them to try.
Affirmed.
/1 At the plaintiff’s request, and without objection
by the defendants, we hereby dismiss defendant
LTV Steel Company, which has entered bankruptcy
and is protected by the automatic stay (11 U.S.C.
sec. 362) from the continued prosecution of this
suit against it without the permission of the
bankruptcy court.