Johnson v. Meriter Health Servs. Emp. Ret. Plan

• Decision Date: 04 December 2012
• Docket Number: No. 12–2216.,12–2216.
• Parties: Phyllis JOHNSON, et al., on behalf of themselves and all others similarly situated, Plaintiffs–Appellees, v. MERITER HEALTH SERVICES EMPLOYEE RETIREMENT PLAN and Meriter Health Services, Inc., Defendants–Appellants.
• Court: U.S. Court of Appeals — Seventh Circuit

702 F.3d 364

Phyllis JOHNSON, et al., on behalf of themselves and all others similarly situated, Plaintiffs–Appellees,

v.MERITER HEALTH SERVICES EMPLOYEE RETIREMENT PLAN and Meriter Health Services, Inc., Defendants–Appellants.

No. 12–2216.

United States Court of Appeals, Seventh Circuit.

Argued Oct. 24, 2012.

Decided Dec. 4, 2012.

Eli Gottesdiener (argued), Attorney, Gottesdiener Law Firm, Brooklyn, NY, for Plaintiffs–Appellees.

Charles C. Jackson (argued), Attorney, Morgan, Lewis & Bockius LLP, Chicago, IL, for Defendants–Appellants.

Before POSNER, WOOD, and TINDER, Circuit Judges.

POSNER, Circuit Judge.

The district court certified this ERISA suit as a class action, and we granted the petition of the defendants (the plan and its administrator, which we'll refer to jointly as Meriter) to appeal the certification. Fed.R.Civ.P. 23(f). The original plaintiff in whose name the suit was filed was dismissed as a plaintiff on the ground that she was not an adequate class representative, Fed.R.Civ.P. 23(a)(4), because of defenses against her that are inapplicable to other members of the class. Yet remarkably, though she was dismissed before the petition to appeal was filed, the briefs continue to list her as a plaintiff—indeed as the only plaintiff. So we have substituted one of the other named plaintiffs. The briefs also manage to avoid describing Meriter's plan, forcing us to dig deep into the record to discover what the parties are quarreling over. This is a recurrent problem: specialized lawyers' failing to appreciate generalist judges' often limited understanding of esoteric financial instruments. See Chicago Truck Drivers, Helpers & Warehouse Workers Union (Independent) Pension Fund v. CPC Logistics, Inc., 698 F.3d 346, 349–53 (7th Cir.2012).

The class consists of more than 4000 participants in the Meriter pension plan who allegedly were not credited with all the benefits to which the plan entitled them. Some of the class members received benefits (claimed to be inadequate) 23 years ago. Some are current, the rest former, participants in the plan. And the plan has been amended a number of times over the last 23 years. As a result of all this variation in the situation of individual class members, their claims have been divided into 10 groups, each of which the district court has certified as a separate subclass having a different class representative. Each subclass was certified under Fed.R.Civ.P. 23(b)(2), which authorizes class action treatment if the defendant “has acted or refused to act on grounds that apply generally to the class, so that final injunctive relief or corresponding declaratory relief is appropriate respecting the class as a whole.” Each subclass seeks a declaration of the rights of its members under the plan and an injunction directing that the plan's records be reformed to reflect those rights. Meriter challenges the propriety of certification of the subclasses under section (b)(2) of the class action rule.

The plan is a defined benefit plan, which as the name implies specifies the pension benefits to which a participant is entitled, rather than a defined contribution plan, in which the pension benefit is a fully funded retirement account of the participant. Meriter's plan resembles a type of defined benefit plan known as a cash balance plan. See Berger v. Xerox Corp. Retirement Income Guarantee Plan, 338 F.3d 755, 757–58 (7th Cir.2003). The plan entitles the participant, upon reaching normal retirement age (65), to receive a pension benefit that he can take either as an annuity (annual payment until death, with nothing left over for heirs) or in a lump sum of equivalent value. The amount of the benefit is based on a specified percentage of the employee's salary each year (called the yearly accrual) plus annual interest (called the index rate) on that amount. Meriter calculates the lump sum by multiplying the yearly annuity payment to which the participant would be entitled by 8 (called the lump sum factor).

Each year Meriter reports to every participant the total amount of benefits that the participant has accrued to date. It calculates those benefits by multiplying the yearly accruals with which the participant has already been credited, plus the accumulated interest on those accruals, by the lump sum factor, to yield what it calls the participant's “cash balance.” That is equal to the lump sum pension benefit that the participant would receive if he quit immediately but was treated as if he were of normal retirement age and therefore not entitled to receive any further yearly accruals or interest.

All this is rather dense; an example may clarify. Suppose an employee begins working for the company in 1987 at age 50, at an annual salary of $50,000. Assume a fixed index rate of 4 percent and that the yearly accrual is three-fourths of one percent of his salary, or $375. Thus:

+---------------------------------------------------------------------------+
                ¦    ¦Prior    ¦ ¦Growth at¦ ¦Prior Accrued ¦  ¦Yearly     ¦ ¦Total Accrued ¦
                ¦Year¦Accrued  ¦x¦Index    ¦=¦Benefits Plus ¦8F¦Accrual    ¦=¦Benefits      ¦
                ¦    ¦Benefits ¦ ¦Rate     ¦ ¦Interest      ¦  ¦           ¦ ¦              ¦
                +----+---------+-+---------+-+--------------+--+-----------+-+--------------¦
                ¦1987¦$0       ¦x¦104%     ¦=¦$0            ¦8F¦$375       ¦=¦$375          ¦
                +----+---------+-+---------+-+--------------+--+-----------+-+--------------¦
                ¦1988¦$375     ¦x¦104%     ¦=¦$390          ¦8F¦$375       ¦=¦$765          ¦
                +----+---------+-+---------+-+--------------+--+-----------+-+--------------¦
                ¦1989¦$765     ¦x¦104%     ¦=¦$795.60       ¦8F¦$375       ¦=¦$1,170.60     ¦
                +----+---------+-+---------+-+--------------+--+-----------+-+--------------¦
                ¦1990¦$1,170.60¦x¦104%     ¦=¦$1,217.42     ¦8F¦$375       ¦=¦$1,592.42     ¦
                +----+---------+-+---------+-+--------------+--+-----------+-+--------------¦
                ¦1991¦$1,592.42¦x¦104%     ¦=¦$1,656.12     ¦8F¦$375       ¦=¦$2,031.12     ¦
                +----+---------+-+---------+-+--------------+--+-----------+-+--------------¦
                ¦1992¦$2,031.12¦x¦104%     ¦=¦$2,112.36     ¦8F¦$375       ¦=¦$2,487.36     ¦
                +----+---------+-+---------+-+--------------+--+-----------+-+--------------¦
                ¦1993¦$2,487.36¦x¦104%     ¦=¦$2,586.85     ¦8F¦$375       ¦=¦$2,961.85     ¦
                +----+---------+-+---------+-+--------------+--+-----------+-+--------------¦
                ¦1994¦$2,961.85¦x¦104%     ¦=¦$3,080.32     ¦8F¦$375       ¦=¦$3,455.32     ¦
                +----+---------+-+---------+-+--------------+--+-----------+-+--------------¦
                ¦1995¦$3,455.32¦x¦104%     ¦=¦$3,593.53     ¦8F¦$375       ¦=¦$3,968.53     ¦
                +----+---------+-+---------+-+--------------+--+-----------+-+--------------¦
                ¦1996¦$3,968.53¦x¦104%     ¦=¦$4,127.27     ¦8F¦$375       ¦=¦$4,502.27     ¦
                +---------------------------------------------------------------------------+
                

At age 60 the employee will have accrued benefits of $4,502.27 and so will have a cash balance of $36,018.16 (8 x $4,502.27). If he quits then, he will receive no further yearly accruals but his retirement benefits will continue to grow at the annual index rate of 4 percent, giving him a cash balance at age 65 of $43,821.60 ($36,018.16 x 1.04 ⁵). That will be his lump sum retirement benefit if he chooses the lump sum in preference to an annuity.

At age 65 that benefit is equal to the cash balance. But until Meriter attempted to amend the plan in 2003 (as we discuss below), an early retiree who preferred a lump sum to an annuity received the cash balance as of the date of his early retirement. If the employee in our numerical example retired at 60, he could have chosen to receive a lump sum then of $36,018.16, while as mentioned earlier if he quit at 60 but waited to take his retirement benefit until he was 65 he would stop receiving yearly accruals (0.75% of his salary) but continue to receive interest at the index rate and so at 65 he would receive $43,821.60.

But ERISA requires that an early retiree receive the “actuarial equivalent” of the pension benefits to which he would be entitled at normal retirement age. That would be the lump sum pension benefit (if the retiree prefers that to an annuity) that the plan participant would receive at age 65, discounted to present value to reflect the fact that a dollar received today is worth more than a dollar received in the future because if received today it can be invested and immediately begin growing. See 29 U.S.C. § 1054(c)(3); Berger v. Xerox Corp. Retirement Income Guarantee Plan, supra, 338 F.3d at 758–59, 761. In our example of a 60–year–old employee who has a current cash balance of $36,018, his benefits would be projected forward at the 4 percent index rate to grow to $43,821 at the normal retirement age of 65 but then discounted to present value at the discount (interest) rate prescribed by ERISA.

The interplay between future indexing and discounting is called a “whipsaw” because it involves looking forward to the value at normal retirement age and then backward to the present and thus resembles the action of a two-person saw (a “whipsaw”). ERISA fixes the discount rate using a complicated formula based on bond interest rates. See 26 U.S.C. §§ 417(e)(3)(C), 430(h)(2)(C)–(D); cf. Berger v. Xerox Corp. Retirement Income Guarantee Plan, supra, 338 F.3d at 759. If the index rate exceeds the discount rate, the present value of the retirement-age lump sum pension benefit will exceed the current cash balance, because the retirement benefit will grow at a faster rate through interest accrual than it shrinks through discounting. For example, at a discount rate of 2 percent, the 60–year old employee in our example would receive $39,690 (= $43,821 / 1.02 ⁵) upon quitting rather than just $36,018.16. A further complication, which we can ignore however, is the discounting required when the early retiree chooses an annuity rather than a lump sum. The earlier the annuity begins, the longer it will be received; to adjust, the amount of the...