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CCH® PENSION — 9/23/11

Court Rejects Payment Of Overstated Pension Benefits; Keeps Severance Pact

from Spencer’s Benefits Reports: Miscalculation of some of the benefit options available under a pension plan was not intentional, said the Seventh Circuit Court of Appeals, and did not warrant payment of the higher amount. This was the decision in Kenneth Pearson v. Voith Paper Rolls, Inc., (No. 09-3884).

Kenneth Pearson was age 57-1/2 when he was terminated from Voith Paper Rolls after 14 years of service. As part of the severance package negotiations, Mr. Pearson was given information about his pension benefits payable from the company defined benefit plan. He had five options from which to chose: a lump sum distribution, five-year certain, 50% joint and survivor, 100% joint and survivor, or a straight life annuity.

The amount of the lump sum distribution was correct, but the other four options were overstated by nearly 64% because the calculation was based on Mr. Pearson being eligible for full retirement when, in fact, he was only eligible for reduced early retirement benefits. As a result, the 50% joint and survivor option that he originally selected provided a benefit of $706.74 a month as opposed to what he had originally been told—$1,156.89 per month.

Mr. Pearson signed the severance agreement with Voith Paper on Nov. 14, 2006, and the completed pension benefit election form showing the $1,156.89 amount on Dec. 29, 2006. In January, a human resources clerk discovered the erroneous calculation and prepared a corrected election form with the new, lower figures. Mr. Pearson never returned the recalculated election form and, as a result, never began receiving his pension benefits. Instead, he sued the pension plan.

Original Amounts Sought

The severance package was negotiated under the threat of a potential age discrimination lawsuit. Mr. Pearson contended in his suit “that he relied on the amounts stated on the original election form when he made certain concessions in the severance agreement regarding Voith Paper’s payment of his health insurance premiums. His complaint asks the court to estop the Plan from paying him anything other than the amount stated in the original election form because he had relied upon those terms to his detriment when negotiating his severance agreement.”

The Seventh Circuit noted that “Ordinarily, the written plan document governs ERISA plan administration….Statements or conduct by individuals implementing the plan may estop the employer from enforcing a plan’s written terms only in extreme circumstances.” Citing its earlier decision in Kannapien v. Quaker Oats Company (507 F.3d 629, 636, 7th Cir. 2007), the court said that a plaintiff must show the following things to demonstrate that extreme circumstances are warranted: “(1) a knowing misrepresentation; (2) made in writing; (3) reasonable reliance on that misrepresentation by the plaintiff; and (4) that the reliance was to the plaintiff’s detriment.”

The parties agreed that the calculations were made in writing and that Mr. Pearson had “reasonably relied upon them.”

The Seventh Circuit rejected the charge of misrepresentation. Mr. Pearson contended that the overstated numbers were used to influence him to take a smaller severance package. But, the court pointed out that the plan had nothing to gain by presenting overstated numbers; it was the company that gained, but Mr. Pearson had not sued the company. That the company representative “may have intentionally mislead Pearson in order to gain an advantage in severance negotiations is irrelevant in an action against the Plan.”

The lump sum distribution calculation was correct, the Seventh Circuit noted. “It seems exceedingly unlikely that” the company representative, “if he was truly trying to deceive Pearson, would risk giving Pearson an option for an accurate lump sum payment that would have nullified any negotiating advantage. In the aggregate, none of Pearson’s evidence points to anything more than an inadvertent mistake or negligence by the Plan.”

Mr. Pearson agreed in his disposition that he did not want to rescind the severance agreement, but wanted the plan to pay him the amounts shown in the original election form. “What he wants is the full benefit of the severance agreement and also the inflated pension benefits. What he is legally entitled to is the full benefit of the severance agreement and the correctly calculated pension amounts. His quarrel is not with the Plan; it is with his former employer.”

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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