Dennison v. Mony Life Retirement Income Security Plan for Employees , 710 F.3d 741 ( 2013 )

In the
United States Court of Appeals
For the Seventh Circuit
No. 12-2407
JOHN J. D ENNISON, on behalf of himself and
all others similarly situated,
Plaintiff-Appellant,
v.
MONY L IFE R ETIREMENT INCOME S ECURITY P LAN
FOR E MPLOYEES, et al.,
Defendants-Appellees.
Appeal from the United States District Court
for the Western District of Wisconsin.
No. 3:10-cv-338-bbc—Barbara B. Crabb, Judge.
A RGUED JANUARY 18, 2013—D ECIDED M ARCH 6, 2013
Before P OSNER, F LAUM, and S YKES, Circuit Judges.
P OSNER, Circuit Judge. The district court certified this
ERISA suit as a class action, dismissed one of the
two claims in the suit, and granted the defendants’
motion for summary judgment on the other one. The
plaintiff appeals, raising issues of plan interpretation
and also complaining about the district judge’s refusal to
2 No. 12-2407
allow him to conduct discovery to determine whether
the plan’s rejection of his claim was motivated by a
conflict of interest. The only class member about whom
there is information in the appellate record is the plaintiff.
He left MONY (Mutual of New York Insurance Com-
pany, now a subsidiary of AXA), where he had been
employed in a senior position, in 1996. While employed
there he had participated in two retirement plans. One was
the Retirement Income Security Plan for Employees, which
the parties call “RISPE”; it is a tax-qualified defined
benefits pension plan; that is, it guarantees specified
retirement benefits and provides favorable tax treatment
both to the employer, who funds the plan, and the plan
participants. The other plan was the Excess Benefit Plan
for MONY Employees, which the parties call the “Excess
Plan.” It too is a defined benefits pension plan, but it is
an unfunded one—that is, the benefits are paid directly
by the employer rather than by a trust established and
funded by the employer, and there are no special tax
advantages. Such plans, which are intended for highly
compensated employees, are referred to colloquially as
“top hat” plans. Comrie v. IPSCO, Inc., 636 F.3d 839,
840 (7th Cir. 2011); In re New Valley Corp., 89 F.3d 143, 148-
49 (3d Cir. 1996).
Both plans entitled the plaintiff to begin receiving the
benefits promised by them when he turned 55, which
he did in 2009. And both gave him a choice, to be made
then, between taking his benefits in the form of a “straight
life” annuity—a fixed monthly payment for the rest of
his life—and taking them as a lump sum. The lump
No. 12-2407 3
sum form was represented to be the actuarial equivalent
of the annuity.
To determine actuarial equivalence requires two spec-
ifications. The first is an estimate of how long the recipient
is likely to live (an estimate not challenged by either side
in this case) and therefore for how long he would be
likely to receive the monthly annuity payment if he
chose the annuity rather than the lump sum. The
second requirement is a discount rate to apply to the
projected annuity payments. A discount rate is an
interest rate used not to determine how an investment
will grow but instead to calculate the present value of
a future receipt. If (to take a simple example of how
discounting to present value works) you expect to
receive $100,000 20 years from now and you want to
know what that’s worth today and you think that
interest rates over the next 20 years will be 6 percent,
you can by using a present-value calculator discover that
the present value of that expected future payment is
$31,180.47. That is the amount that, invested at 6 percent
interest compounded annually, will grow to $100,000 in
20 years. The lower the assumed interest rate, the more
slowly the investment will grow and hence the higher
the present value—the lump sum equivalent. At a
10 percent rate the present value of $100,000 in 20 years
is only $14,864.36, while at 3 percent it would be
$55,367.58. The dispute in this case is over the discount
rate that the plan used to calculate the lump sum equiva-
lent of the annuity—$1,888.46 a month—that the plain-
tiff was entitled to begin receiving when he turned 55.
4 No. 12-2407
When in 2009 the plaintiff became eligible to begin
receiving benefits, he told MONY (as we’ll refer collec-
tively to the defendants, which include besides the insur-
ance company the two pension plans in which the
plaintiff participated and their administrators) that he
wanted lump sums. So MONY cut him two checks.
One was his RISPE lump sum, $325,054.28 (which
happens to have been $10,000 less than his annual salary
in his last year as an employee of MONY), and the other
his Excess Plan lump sum, $218,726.38. The discount
rate that the plan used to calculate his lump sum
RISPE benefits was a blended rate called a “seg-
ment rate,” 26 U.S.C. § 417(e)(3)(C), of roughly 5.24 per-
cent. A segment rate is an interest rate calculated
by the Treasury Department on the basis of investment-
grade corporate bond rates. The details of the calcula-
tion are irrelevant to the appeal and the exact segment
rate used by MONY in calculating the plaintiff’s
RISPE benefits is not in the record and is not a subject
of dispute between the parties. The discount rate
that MONY used to determine the plaintiff’s Excess
Plan lump sum was 7.5 percent.
The plaintiff contends that the discount rate required by
both plans was a rate computed by the Pension Benefit
Guaranty Corporation on the basis of annuity premiums
charged by insurance companies. Applied to the plain-
tiff’s lump sums under the two plans, this rate, called the
“PBGC rate,” would have been only 3 percent—less
than half the average of the two discount rates that the
plan used; and remember that the lower the discount
rate, the greater the lump sum. (If the discount rate
No. 12-2407 5
were zero, the lump sum would be simply the sum of the
participant’s predicted future benefits.) Oddly, we
haven’t been told how much greater the lump sums to
which the plaintiff would be entitled (let alone the
lump sums to which the other thousand or so members
of the certified class would be entitled) would be if the
lower discount rate were used. But as our numerical
example indicated, the lump sums would undoubtedly
be much greater.
When the plaintiff left MONY’s employ in 1996, the
RISPE plan provided that the discount rate would be the
PBGC rate as of 120 days before the lump sum was due
to be paid; and that rate turned out as we just said to be
3 percent. The Excess Plan did not specify a rate but as
we’ll explain it almost certainly was 7.5 percent, the rate
the plan used.
A decade later, Congress, in the Pension Protection Act
of 2006, Pub. L. 109-280, 120 Stat. 780, authorized plan
sponsors to increase a plan’s lump sum discount rate by
amendment to the plan, and to make the increase retroac-
tive if they wanted. See sections 302 and 1170 of the Act,
120 Stat. 920-21, 1063. Before the Act took effect, such a
retroactive increase in the discount rate (and thus reduc-
tion in the size of the lump sum) would have violated
ERISA’s anti-cutback provision. 29 U.S.C. § 1054(g).
The Pension Protection Act changed this but did (also
in section 302) place a ceiling on retroactive rate
increases for tax-qualified plans: the ceiling is the
segment rate mentioned earlier. The ceiling is inap-
plicable to the Excess Plan because it is not tax-qualified.
6 No. 12-2407
In 2009, three years after the Pension Protection Act
was passed and shortly before the plaintiff turned 55
and thus became entitled to begin receiving his retire-
ment benefits, MONY raised the RISPE discount rate to
the segment rate. The rate that MONY used to compute
the plaintiff’s benefits under the Excess Plan remained
at 7.5 percent.
MONY could lawfully change the RISPE discount rate
retroactively only if the plan authorized such an amend-
ment. A plan is not required to do that, and it can if it
wants promise not to, thereby creating a “contractual anti-
cutback” rule that is enforceable like any other plan
provision. Kemmerer v. ICI Americas Inc., 70 F.3d 281, 288-89
(3d Cir. 1995). The Pension Protection Act provides an
out only with respect to the statutory anti-cutback rule.
The RISPE plan in force when the plaintiff left MONY
states that the pension rights of an employee who left on
or before the effective date of a particular amendment
to the plan “shall be determined solely under the terms
of the Plan as in effect on the date of his or her termina-
tion of employment or retirement . . . unless [the amendment
is] made applicable to former Employees” (emphasis added).
So the plan did allow MONY to amend it to change
the discount rate retroactively. But the plan also pro-
vides “that no amendment shall . . . reduce the Accrued
Benefit of any Participant.” The plaintiff was a plan
participant and his benefit had “accrued” back in 1996,
when he left the company. But “Accrued Benefit” is a
defined term in the plan—defined as “the value of a
Participant’s Retirement Benefit expressed as a Straight-
No. 12-2407 7
Life Annuity determined according to the terms of the
Plan.” “Retirement Benefit” is another defined term: it
“means a benefit payable on the dates, in the forms”
specified in a section of the plan that under the heading
“Optional Forms” allows the participant to choose a
lump sum “in lieu of the Normal Form,” which is the
straight-life annuity.
We interpret these provisions to mean that
the Accrued Benefit—that which cannot be reduced
retroactively by amendment—is the annuity, and that
the lump sum, while a Retirement Benefit, is not the
Accrued Benefit and therefore can be reduced retroac-
tively. The term “Retirement Benefit” encompasses all
forms of benefits payment that a participant can choose,
including the lump sum option that the plaintiff chose
in lieu of the annuity. See Call v. Ameritech Management
Pension Plan, 475 F.3d 816, 820-21 (7th Cir. 2007). Nothing
in the plan forbids retroactively amending the discount
rate used to calculate the lump sum benefit if the par-
ticipant chooses the lump sum in preference to the annuity.
The plaintiff cites our decision in Call as authority
for interpreting “accrued benefit” (that which under
the terms of the MONY plan can’t be changed retroac-
tively) to include a lump sum “retirement benefit.” But
the plan in Call had not defined “accrued benefit.” And
the issue in that case was not whether a lump sum
pension benefit was excluded by the term “accrued bene-
fit” but whether an early-retirement benefit, regardless
of the form it took, was excluded by the term.
So the plaintiff’s complaint about his RISPE benefit
fails, but what about the lump sum he received as a
8 No. 12-2407
participant in the Excess Plan? That plan isn’t mentioned
in RISPE. The Excess Plan is very short—eight pages,
compared to RISPE’s more than a hundred pages—and
incorporates many provisions of the longer plan by ref-
erence. It does not specify a discount rate, as we men-
tioned. But it provides that benefits “shall be paid . . . in
accordance with an automatic payout provision of the
Retirement Plan.” In the definitions section of the Excess
Plan we learn that “Retirement Plan” means RISPE. The
parties agree that this is a directive to look to RISPE for
guidance to what discount rate to use to calculate
lump sum benefits under the Excess Plan. But RISPE
doesn’t specify an interest rate for computing lump
sum benefits under the Excess Plan. What it says (in
section 1.3(a)) is that “for purposes of determining
lump sum distributions and for all other payment
forms subject to [Internal Revenue] Code Section
417(e)”—that is, for tax-preferred plan payments—the
“applicable interest rate shall be the interest rate
prescribed by the Secretary of the Treasury under Code
Section 417(e),” and that is the segment rate. But section
1.3(c) of RISPE provides that “for all other purposes
under the Plan” the discount rate is “7.5 percent per
year compounded annually.”
So the question is whether the reference to “lump
sum distributions” in section 1.3(a) includes benefits
under the Excess Plan. If not, section 1.3(c) governs and
the discount rate applicable to the Excess Plan is the
“for all other purposes” rate of 7.5 percent. The latter is
undoubtedly the correct reading because section 1.3(a)
No. 12-2407 9
is limited to benefits from tax-preferred plans and
the Excess Plan is not tax preferred.
The clincher to this interpretation is the plan admin-
istrators’ consistent, unchallenged practice over many
years of using the 7.5 percent figure to calculate lump
sum benefits under the Excess Plan. When the con-
sistent performance of parties to a contract accords with
one of two alternative interpretations of the contract,
that’s strong evidence for that interpretation. This is a
general principle of contract interpretation rather than a
provision of ERISA, 2 E. Allan Farnsworth, Farnsworth on
Contracts § 7.13, pp. 329-30 (3d ed. 2004); Restatement
(Second) of Contracts, § 202, comment (g) (1981), but it is a
principle that is applied in the interpretation of ERISA
plans. See Gallo v. Amoco Corp., 102 F.3d 918, 920-22 (7th
Cir. 1996); McDaniel v. Chevron Corp., 203 F.3d 1099, 1113-
14 (9th Cir. 2000); Allen v. Adage, Inc., 967 F.2d 695, 702-03
(1st Cir. 1992); Schultz v. Metropolitan Life Ins. Co., 872
F.2d 676, 679-80 (5th Cir. 1989).
And it’s no surprise that the discount rate in the
Excess Plan should be as high as it is. “Top hat” plans
provide gravy for highly compensated employees, and
one expects them to be less risk averse than other em-
ployees, hence more likely to prefer taking their benefits
in a lump sum, which they can invest in risky ventures
with a high expected return—financial risk and return
being positively correlated. If interest rates turned out
to exceed the discount rate in the plan, the lump sum
generated by the plan rate would confer a windfall on
the participant, for remember that the lower the dis-
10 No. 12-2407
count rate, the larger the lump sum, which the recipient
can invest at whatever current interest rates are. MONY
minimizes its exposure by fixing a high discount rate,
which both reduces the size of its lump sum outlays
and encourages plan participants to choose the annuity
over the lump sum option, since, the smaller the lump
sum relative to the annuity, the more attractive the
annuity is.
That leaves for decision only the plaintiff’s claim to
be allowed discovery to determine whether a conflict of
interest vitiates the rejection of his interpretation by
the plans’ benefits appeals committee. He thinks it suspi-
cious that the committee upheld the ruling, initially
made by a benefits administrator, on a ground different
from the administrator’s. There is nothing suspicious
about such a sequence (which is common in adjudica-
tion) if the committee’s ground is valid. But he also
points out that the RISPE plan was having financial
troubles in 2009 (unsurprisingly, given the state of the
economy then), which required MONY to make
additional contributions to the plan. And because the
Excess Plan is not funded at all, the benefits payable
under it come directly out of the company’s pocket
rather than out of a trust fund. At the oral argument the
plaintiff’s lawyer told us that MONY’s liability to the
class if the class action is successful would be in
the neighborhood of $10 million—a large sum, though
we haven’t been told the size of either RIPSE or the
Excess Plan, and MONY’s parent company, AXA,
manages $450 billion in assets and has $18 billion in
equity. See Axa Equitable, 10-Q Consolidated Balance Sheet,
No. 12-2407 11
September 30, 2012, www.sec.gov/cgi-bin/viewer?action=
view&cik=727920&accession_number=0001193125-12-
462659 (visited Feb. 19, 2013).
The plaintiff wants as a first step to see the minutes of
the meeting at which the committee voted to deny his
claims. But his lawyer made clear at oral argument that
if he received them this would be followed by his
deposing the committee’s members.
We do not think that benefits review officers should
be subjected to extensive discovery on a thinly based
suspicion that their decision was tainted by a conflict of
interest. There is a latent conflict of interest any time
someone is asking for money from a company (from
anyone, in fact), though it is muted to an extent if the
party asking is an employee or former employee, since
good relations with employees are a corporate asset.
Marrs v. Motorola, Inc., 577 F.3d 783, 787 (7th Cir. 2009).
Formal adjudicators, such as judges, jurors, arbitrators,
administrative law judges, and members of appellate
boards of agencies, are largely insulated by immunity
doctrines from interrogatories and depositions aimed
at finding evidence of conflicts of interest. Informal
adjudicators, such as members of a pension fund’s
benefits review committee, have a legitimate claim to a
degree of similar protection from discovery, used so
often as a form of harassment. Courts are drowning in
discovery; imagine the burdens, not only on them but
on employers, of discovery requests that must be
complied with every time there is a colorable claim
that private pension or welfare benefits were wrongly
12 No. 12-2407
denied. Especially in a class action suit with a thousand
or more class members, the burdens on the benefits
review process of discovery in search of evidence of
a conflict of interest could be considerable.
Moved by such concerns we held in Semien v. Life Ins. Co.
of North America, 436 F.3d 805, 815 (7th Cir. 2006), that
discovery in a case challenging the benefits determina-
tion of plan administrators is permissible only in “excep-
tional” circumstances—circumstances in which the claim-
ant can “identify a specific conflict of interest or instance
of misconduct” and “make a prima facie showing that
there is good cause to believe limited discovery will
reveal a procedural defect.” The continued validity of
that holding has been questioned, however, see, e.g.,
Gessling v. Group Long Term Disability Plan for Employees
of Sprint/United Mgmt. Co., 1:07-cv-483-DFH-DML, 2008
WL 5070434 (S.D. Ind. Nov. 26, 2008), in light of the
Supreme Court’s decision, subsequent to Semien, in Metro-
politan Life Ins. Co. v. Glenn, 554 U.S. 105 (2008).
Glenn is not about discovery, but it implies a role for
discovery in judicial review of benefits determinations
when a conflict of interest is alleged. Murphy v. Deloitte
& Touche Group Ins. Plan, 619 F.3d 1151, 1161-64 (10th
Cir. 2010). How big a role is the question. We have inter-
preted the Supreme Court’s opinion to mean that “the
likelihood that the conflict of interest influenced the deci-
sion [of the plan administrator] is . . . the decisive con-
sideration” in whether to uphold a decision “that
might just as well have gone the other way.” Marrs
v. Motorola, Inc., supra, 577 F.3d at 789 (emphasis in origi-
No. 12-2407 13
nal). In other words, while “the correct standard of
review to be applied [if the plan delegates interpretive
authority to the plan administrator] . . . remains [after
Glenn] the arbitrary and capricious standard, . . one of the
factors that must be taken into account in applying that
standard is any conflict of interest.” Fischer v. Liberty Life
Assurance Co., 576 F.3d 369, 375 (7th Cir. 2009). And to
determine the likelihood and gravity of a conflict of
interest might require discovery to “identify a specific
conflict of interest or instance of misconduct,” a task of
identification that in Semien we said was a prerequisite to
discovery, not a goal of discovery.
These cases suggest a softening, but not a rejection, of
the standard announced in Semien; and there can be no
doubt that even when some discovery is necessary in
a particular case to explore a conflict of interest, trial
courts retain broad discretion to limit and manage dis-
covery under Rule 26 of the civil rules.
With the case law in flux, this is not the occasion for
our trying to trace out the contours of permissible dis-
covery under ERISA. The reader may have noticed that
in discussing the plaintiff’s claim to be entitled to the
lower discount rate, we said nothing about deferring to
the benefits committee’s decision; we sang no hosannas
to discretion. We treated the claim as if it were a claim
of breach of contract that had been rejected by a
district court and was being reviewed by us de novo. We
had no occasion to defer to a plan administrator’s deter-
mination with which we might disagree—the only situa-
tion in which a deferential standard of judicial review
bites. For we agreed with it.
14 No. 12-2407
The plaintiff could argue that if discovery were permit-
ted and turned up evidence of a conflict of interest
serious enough to vitiate the decision of the benefits
appeals committee, he would be entitled to a further
hearing. But a hearing before whom? Any committee
composed of plan officials would have the same conflict
of interest. The plaintiff would want the district court
to conduct the hearing. In other words, he would want
to convert this to a straightforward breach of contract
case. And he would want us to review the district
court’s decision de novo. Well, that’s what we’ve done;
and we’ve concluded that even under that favorable (to
the plaintiff) standard of review, which gives no weight
to the decision of the benefits appeals committee, the
committee’s ruling must stand.
A FFIRMED.
3-6-13