Company makes pension calculation mistake in favor of former employees

[Gary]

Say a company discovers that they made a mistake and they gave al retiree an extra $100 per month. Say the company discovers this several years after the person began receiving a pension. Can they correct the mistake and then pay the smaller benefit? Has it been done?

[richard]

Yes.

Several choices.

1. Reduce the monthly pension for all future years by the actuarial equivalent of the overpayment.

2. Have the employee repay the plan a lump sum equal to $100 times the number of monthly payments made (with or most likely without interest). Then reduce his pension prospectively to the original correct amount.

3. Underpay the employee $100 for the same number of future payments that he was overpaid (perhaps adjusting this for interest, probably not). After these payments are made, start paying him the originai correct payment.

4. Stop making payments to the employee (i.e., pay him zero dollars) until the overpayments are used up.

5. Reduce the pension prospectively to the correct amount but not ask for any correction of the overpayment.

6. Keep paying him the higher incorrect pension.

Number 6 would only be possible if the employee could claim that he relied on the extra $100 per month for a certain lifestyle. Unlikely.

Number 5 would be easy, but wouldn't involve any correction. The plan would be out the overpayment. If politically a problem, this is acceptable, and this is done sometimes.

Number 1 is often done, but the actuarial equivalence is sometimes tricky for the employee. Also, he now has a permanent pension that is less than his promised pension; while actuarially correct, might be difficult to swallow.

Number 3 is a nice crude solution, and is clear to the employee. Actuaries (like myself) won't like ignoring interest and will also worry about the risk of the employee dying before the overpayments are completely offset, but actuaries (like myself) like to worry too much.

Number 2 is unlikely because of the hardship to the retiree, and I don't like money going into the pension plan.

Number 3 is also unlikely because of the zero monthly pension would be a hardship.

If the plan is to be made whole, I personally like number 3 or number 1. If the plan cannot (politically) be made whole, then number 5. Number 6 would be unusual, and I don't like number 2 or number 4. Numbers 1, 3 and 5 are the most commonly done.

[jlf]

DOESN'T A STATUTE OF LIMITATIONS KICK IN AFTER A CERTAIN NUMBER OF PAYMENTS?

AFTERALL, WHY SHOULD A RETIREE/BENEFICIARY SUFFER A FINANCIAL HARDSHIP BECAUSE THE PLAN ADMINISTRATOR WAS "OUT TO LUNCH"?

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[Guest Keith N]

Be careful that what ever you do is in compliance with your Plan Document. It should tell you which methods are permitted.

[david rigby]

I think that richard has adequately stated the alternatives. However, I disagree with his analysis of number 6. I contend that such a claim by the retiree in very likely.

Keith makes a good point by referring to the plan document. However, in my experience, most documents do not contain any provision that anticipates this. Thus, it becomes a task that the "pension committee" must evaluate. The most significant issue to consider becomes a precedent. Before taking any action, it would be prudent to see if it has happened before, even if no action was taken.

[This message has been edited by pax (edited 07-29-99).]

[david rigby]

probably no legal "statute of limitations" but I think jlf presents a good point, which is why I think the precedent issue is so important.

In a former life, I have had some plan administrative responsibility and seen situations:

1. where the time period in question was so long that no one wanted to "go after" the excess amount paid, and the company did not want to upset anyone so no change was made.

2. Other situations may have been so short that the overpayment was not worth worrying about, as long as future payments were the corrected amount.

Every situation must be evaluated on its own facts, and any relevant precedent is then factored into what the solution is.

[Guest wortmanave]

let me ask a related question-what if participant didn't start getting payouts yet, but was given incorrect benefit statements for 15 years showing his benefit was higher than it actually was-any advice?

[Guest]

I would say that the annual benefit statement is nothing more than an estimate. In most cases they contain language to the effect that "this is an estimate and that the actual benefit may differ" and that the "actual plan document governs".

I also recognize that the courts sometimes get involved, but I don't know how successful participant suites based soley on benefit statements are. Also, I'm assuming that these are annual benefit statements given to the participants with out a direct request from the participant.

[RCK]

It seems to me that using plan assets to pay a benefit that the participant is not entitled to is a breach of Fiduciary Responsibility. Where the benefit is wrong going forward, that must be reduced. And some effort must be made to collect past overpayments--either directly or through reduction of future benefits.

Wrong benefits on benefit statements is just that--a wrong estimate. As long as they have an SPD and a disclaimer on the estimate, the plan can only pay the correct level of benefit. The only time that the participant is entitled to more is if they can prove (in court) that they acted in reliance on the statements. And then, the correct benefit is paid form the plan and the balance from the employer.

[david rigby]

Well, looking at the facts in the original question, I would suggest that the retiree who has received an additional $100 per month for several years has "relied on" the actions of the plan sponsor. Seems pretty likely that cutting back will cause some friction. And it's certain that trying to recoup overpayments will cause negative reaction and publicity.

Since this is a DB plan, it could be argued that other participants have not been harmed, but that argument might not stand up if the plan has been amended (downward) sometime in the recent past.

I stand by my earlier statement: "Every situation must be evaluated on its own facts, and any relevant precedent is then factored into what the solution is."

[RCK]

I agree with your comments in the context of the original question. But I still feel that it is a misuse of plan assets. But if the retiree in question was getting $150 instead of $50, then (s)he would undoubtedly have acted in reliance on the higher level and it would be hard to recover. If he was getting $4100 per month instead of the $4000 that he was entitled to, I would reduce the monthly benefit automatically going forward, and give him a couple of choices on how ai was going to recover the overpayment.

[Guest Amjones1]

I have a simialr situation but it is a death benefit.Widow was told that she is not entitled to the previously paid death benefit should have been paid to the employer instead. How did she get the money if she wasn't the beneficiary? Subsequently, the market dropped and she doesn't have it the original amount? Thus far, the non profit organization has not produced the documents that says she is not the beneficiary. Who is liable? What can she do? Does she have to pay for transfer fees also? They have treatened her with litigation. What does she do now?