571 F.3d 644 (7th Cir. 2009), 08-1135, Fry v. Exelon Corp. Cash Balance Pension Plan
|Citation:||571 F.3d 644|
|Opinion Judge:||EASTERBROOK, Chief Judge.|
|Party Name:||Thomas FRY, Plaintiff-Appellant, v. EXELON CORPORATION CASH BALANCE PENSION PLAN, Defendant-Appellee.|
|Attorney:||Douglas R. Sprong, Attorney (argued), Korein Tillery, St. Louis, MO, George A. Zelcs, Attorney, Korein Tillery, Chicago, IL, for Plaintiff-Appellant. Eric S. Mattson, Attorney, Constantine L. Trela, Jr., Attorney (argued), Sidley Austin, Chicago, IL, for Defendant-Appellee.|
|Judge Panel:||Before EASTERBROOK, Chief Judge, and EVANS and SYKES, Circuit Judges.|
|Case Date:||July 02, 2009|
|Court:||United States Courts of Appeals, Court of Appeals for the Seventh Circuit|
Argued April 3, 2009.
Rehearing and Rehearing En Banc Denied July 30, 2009.
The Exelon Corporation Cash Balance Pension Plan is a defined-benefit plan that works like a defined-contribution plan, except that the individual accounts are virtual. All of the Plan's assets are held in a single trust; the Plan does not have a separate pot of assets to match each employee's account. Cooper v. IBM Personal Pension Plan, 457 F.3d 636 (7th Cir.2006), and Berger v. Xerox Corp. Retirement Income Guarantee Plan, 338 F.3d 755 (7th Cir.2003), discuss more fully the nature of a cash-balance plan.
Many pension plans, including Exelon's, give workers the option of taking a lump-sum distribution when they quit or retire. A defined-contribution plan just turns over the balance of the account. 29 U.S.C. § 1002(23)(B). A defined-benefit plan operates under different rules-or did until 2006, when the addition to ERISA of 29 U.S.C. § 1053(f) brought the treatment of lump-sum distributions into harmony. Our plaintiff, Thomas Fry, left Exelon in 2003, so we describe the former approach, which required pension plans to start with the current balance and add any contractually promised interest (or any other form of guaranteed increase in benefits) through the employee's " normal retirement age." The plan then discounted the resulting number to present value using the " annual rate of interest on 30-year Treasury securities for the month before the date of distribution." 29 U.S.C. § 1055(g)(3), incorporated by 29 U.S.C. § 1053(e)(2).
This process was designed to ensure the actuarial equivalence of the lump-sum payment and the pension available at retirement. But, if the Treasury rate does not match the market return, the process misfires. Berger describes the mechanics. If the Treasury rate is less than a plan's annual guarantee-as it normally will be,
because Treasury bonds have very little risk, and a correspondingly low rate of return-the lump sum balloons (a 3.5% difference in the rates doubles the cash paid out to someone who leaves at 45 and does not plan to retire until 65). If the Treasury rate exceeds the plan's guarantee, as it may during a time when the stock market is in decline, the lump sum shrinks accordingly. For most of the 1990s and 2000s, the Treasury rate was below the guarantees offered by cash-balance...
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