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5500 Preparer's Manual for 2012 Plan Years
The premier resource in the field of Form 5500 preparation, 5500 Preparer's Manual will help you handle the required annual Form 5500 filings for both pension benefits and welfare benefit plans.
An actuary that relied on erroneous data provided by a union pension fund in determining the plan's funding status did not deviate from professional standards or breach the terms of its service contract, a U.S. district court in Ohio has ruled in Tiboni v. Milliman, Inc. The actuary was not required by professional standards or the contract to audit the data and its reliance on the information was reasonable.
Erroneous data results in underestimation of plan liabilities
The actuary served the union pension fund for nearly 16 years, pursuant to a written contract that required it to generate actuarial reports and perform valuations in order to advise the fund of its funding status. The reports were based on information provided to the actuary by the fund. However, data provided to the actuary by the fund proved to be flawed, resulting in an underestimation of the fund liabilities and an erroneous report of its funding status, which led the fund to approve a benefit increase of $600 per month which it would not otherwise have authorized.
Subsequent to replacing the actuary with a new actuary, who calculated a higher amount of unfunded new liability, the fund brought suit under state law and ERISA, alleging that the former actuary should have discovered the defects in the data. The service contract required the actuary to use reasonable efforts to identify errors in data and obtain corrections to erroneous data and to perform all services in accordance with professional standards. The contract did not require the actuary to perform an audit of the data. However, the fund alleged that the actuary, by failing to discover the mistakes in the data and not pressing the fund to verify and update the information, did not comply with professional actuarial standards. Accordingly, the fund sought to recover nearly $500,000 in fees paid over the actuary's 16 years of service and $2.75 million in generalized damages.
Fund's conclusory claims unsupported by evidence
After initially dismissing the fund's state law claims for misrepresentation, negligence, and breach of contract as barred by the applicable statute of limitations, the court ruled that there was no evidence indicating that the actuary's actions were negligent, unreasonable, unsupported, or otherwise deficient.
An expert retained by the pension fund noted that professional standards assign responsibility for the accuracy of data to the party who supplies the information (i.e., the fund) and not to the actuary who relies on the data, as long as that reliance is disclosed. The actuary is required to review submitted data for reasonableness and consistency. However, the court found no evidence to establish that the actuary did not perform such a review or that the actuary would have detected any error if it had followed every step recommended by the fund's expert.
With respect to the breach of contract claim, the court noted that the actuary affirmatively sought verification and updates of data from the fund's administrator. This information was never produced and the actuary, the court stressed, was under no contractual duty to create or obtain its own data, but only to identify and correct errors. If the fund was unresponsive to the actuary's efforts to update and verify the data, the court concluded, the actuary could not be held responsible for the resulting misinformation.
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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