Brengettsy v. LTV Steel (Republic) Hourly Pension Plan, 00-2204

• Decision Date: 28 February 2001
• Docket Number: No. 00-2204,00-2204
• Citation: 241 F.3d 609
• Parties: (7th Cir. 2001) 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. <A HREF="#fr1-1" name="fn1-1">1
• Court: U.S. Court of Appeals — Seventh Circuit

Page 609

241 F.3d 609 (7th Cir. 2001)

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

No. 00-2204

In the United States Court of Appeals For the Seventh Circuit

Argued December 6, 2000

Decided February 28, 2001

Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. No. 98 C 5742--Charles P. Kocoras, Judge.

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...