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CCH® PENSION — 5/24/11

Supreme Court Agrees Communications Were Misleading In CIGNA Cash Balance Case; Remands For Equitable Solution

from Spencer’s Benefits Reports: The U.S. Supreme Court has found that CIGNA Corporation communications introducing its cash balance plan to current pension plan participants were misleading and that the district court should consider “appropriate equitable relief” under ERISA Sec. 502(a)(3) (CIGNA Corp., et al. v. Amara et al., No. 09-804, May 16, 2011).

In November 1997, CIGNA sent a newsletter to its employees explaining that the existing pension plan would be converted to a cash balance plan. The newsletter told current employees that they would receive the greater of the pension benefit to which they were eligible as of Jan. 1, 1998, or the amount in their individual accounts. The district court found that CIGNA’s initial descriptions of its new plan were significantly incomplete and misled its employees. The newsletter said that the new plan would “significantly enhance” the plan and would produce “an overall improvement in…retirement benefits,” and would provide “the same benefit security” with “steadier benefit growth.”

In addition, the newsletter said that employees would “see the growth in their total retirement benefits from CIGNA each year,” and that the initial deposit in their accounts “represented the full value of the benefit they earned for service before 1998.” Also, the newsletter said that the company would not get any cost savings from converting to the new plan.

Benefits Were Not As Good

The district court found that benefits were not as good under the new plan despite the descriptions in the newsletter. For example, the age 55 early retirement provision was eliminated, causing a significant drop in benefits for those who wanted to retire at age 55. In addition, the Supreme Court noted that the initial conversion amounts for a single life annuity were further discounted because the individual’s account balance could be passed onto beneficiaries in case of death before normal retirement age. The Supreme Court termed this to be a “life insurance benefit.” It also pointed out that the new plan shifted the risk of a fall in interest rates from CIGNA to its employees. None of this was explained to employees.

The district court used ERISA Sec. 502(a)(1)(B) to reform the plan and ordered CIGNA to pay benefits accordingly. Under the reform, the cash balance plan was to pay retirement benefits equal to the initial deposit plus annual deposits instead of the formula that paid the greater of the initial deposit or the annual deposits.

Relief Was Needed, But Citation Was Wrong

The Supreme Court agreed that relief should be given, but disagreed that Sec. 502(a)(1)(B) was the vehicle for relief. (In a concurring brief, Justice Scalia agreed with the majority that the case should be remanded to the district court because of the wrong citation, but said that the Court should not have provided further guidance.)

That guidance from the majority suggested to the district court that ERISA Sec. 502(a)(3) was the more appropriate vehicle for providing the plaintiffs with “appropriate equitable relief.” In directing the district court to conduct further proceedings, the Supreme Court said, “In the present case, it is not difficult to imagine how the failure to provide proper summary information, in violation of the statute, injured employees even if they did not themselves act in reliance on summary documents—which they might not themselves have seen—for they may have thought fellow employees, or informal workplace discussion, would have let them know if, say, plan changes would likely prove harmful. We doubt that Congress would have wanted to bar those employees from relief.”

For more information on this and related topics, consult the CCH Pension Plan Guide, CCH Employee Benefits Management, and Spencer's Benefits Reports.

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