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Long Term Care Insurance and Actuaries

At its 2014 Summer Meeting yesterday, the NAIC adopted amendments to its model regulation concerning Long Term Care Insurance to increase the amount of actuarial analysis to support rate filings and rate increases for such policies.   The expanded requirements for the actuarial certification and a supporting memorandum signed by a member of the American Academy of Actuaries include requirements of discussion of margin for foreseeable adverse experience and the calculation of reserves to be held.

As this article discusses, long term care insurance has been and will increasingly be an area for litigation and regulatory scrutiny.    Increasing numbers of seniors and rate increases which often greatly exceeded consumers’ expectations have prompted this new look by regulators.  It is hoped that additional input from actuaries may improve the quality of long term projections of what rates may be needed.

Aug 7

Actuarial Standards Board seeks input on public pension plan work

The Actuarial Standards Board (ASB) has issued a request for comments regarding the standards governing actuarial work for public pension plans.   Currently there are no standards specific to public pension plans, and guidance is provided by those standards of practice applicable to defined pension plans generally.

In its request for comments, the ASB noted the increased scrutiny of public pensions in recent years and several papers released by major actuarial organizations and others related to public pension plan funding.  As a result the ASB plans a “comprehensive review” of actuarial standards regarding their application to public plans.

The ASB requested comments on these topics:

1. Public plan funding and associated actuarial valuations are less uniformly regulated than those of private sector pension plans. Actuaries may be asked by their principal to advise on funding levels. Is additional guidance needed, beyond that in the recently revised pension ASOPs, regarding appropriate public plan actuarial valuation practice to assist actuaries in performing their work and advising their principal? Why or why not? 

2. If yes to question 1, in what areas is additional guidance needed?

3. If yes to question 1, should that guidance take the form of a separate public plan actuarial valuation standard or be incorporated within the existing ASOPs? Why or why not?

4. In general, the ASOPs are principles based and not rules based. As a result, the ASOPs are generally not highly prescriptive. Should the ASOPs related to public plan actuarial valuations be more prescriptive? If so, in what areas?

5. The ASOPs have provided guidance that has been applicable to all areas of practice in the pension community (for example, private sector, multiemployer, public sector). If you believe that additional guidance is needed for public plan actuarial valuations, should any of that additional guidance also apply to non-public sector plans? Why or why not?

6. The current definition of an “intended user” of an actuarial communication is “any person who the actuary identifies as able to rely on the actuarial findings” (ASOP No. 41, Actuarial Communications, section 2.7). Should the ASOPs require the actuary for public pension plans to perform additional, significant work (which would be incorporated in the guidance provided in the ASOPs) that is not requested by the principal if that work provides useful information to
individuals who are not intended users? Why or why not? If so, should this requirement be extended to all pension practice areas? Why or why not?

Any interested person may comment.  Instructions for submitting comments are included in the Request for Comments document.     Comments are due by November 15, 2014.  

When bureaucrats don’t listen to actuaries

Sometimes you don’t know who won an appeal until the very last pages of the decision, but not so in San Allen, Inc. v. Buehrer, 2014 Ohio 2071 (Ohio App., 2014),   The first sentence of that May 15 decision made clear the outcome:

Reduced to its irreducible essence, this appeal  is  about  a  cabal  of  Ohio  Bureau  of Workers’  Compensation  (“BWC”)  bureaucrats and  lobbyists  for  group  sponsors  who  rigged workers’ compensation insurance premium rates.

These were tough words from an appellate court which found that a system in Ohio of premium rating based on experience wrongly favored employers in group rating plans over those employers who were not included in the plans.  The overcharges totaled in the hundreds of millions of dollars, and now the BWC will need to pay it back.  

The Ohio Court of Appeals repeatedly noted that the BWC had been warned by actuaries that the system was prone to manipulation and was, in fact, leading to a premium system which was simply inequitable:

In this case, the BWC violated one of  the  most  basic  principles  of  workers’ compensation insurance, i.e., that  every employer participating  in  Ohio’s  workers’ compensation  system  be  charged  a  reasonable, accurate,  and  equitable  premium  rate  that corresponds to the risk the employer presents to the workers’  compensation  system.  The  record reflects that  for  more  than  fifteen  years, the BWC  ignored  the  criticisms  and recommendations of its actuarial consultants and maintained  an  unlawful  and  inequitable rating system under which  it  knowingly overcharged nongroup-rated  employers workers’ compensation insurance  premiums  in  order  to subsidize  massive,  undeserved premium discounts for group-rated employers. There were both  clear  winners and clear  losers under the BWC’s  rating  system.  The clear winners  were group-rated employers and their group sponsors; the  clear  losers  — the  nongroup-rated employers.

The moral of the story — if you are a bureaucrat and you contract with professionals like actuaries for their expertise, listen to their advice.  

May 9

Being blameless is not enough

You can be a retired plan participant, entirely blameless, and have done everything correctly, but that will not let you hold on to benefit overpayments to you, based on an actuary’s miscalculation.  That was the holding in Groves v. Kaiser Found. Health Plan Inc. (N.D. Cal., 2014), decided on March 24, 2014. 

The plaintiff Ramona Groves had received a benefit estimate from the Kaiser plan actuaries stating that her lump sum benefit upon early retirement would be approximately $750,000. She inquired about this benefit several times, and the number was confirmed each time, and Groves then elected to give up her well-paying job, take early retirement and receive the promised benefit. One condition of taking early retirement was that she could not re-apply for employment with Kaiser in the future.

Almost two years later, Groves received a notice that an audit had determined that her benefit was miscalculated and that she had been overpaid by $240,000 and would be required to repay it. Groves sued Kaiser and its actuaries to attempt to block the repayment claim and to recover damages related to giving up her employment.

Groves’ claim against Kaiser was for equitable estoppel, arguing that the pension plan was precluded from denying her the higher benefit after communicating her entitlement to the benefit and after she relied on that communication. The court found that ERISA precluded such a claim where there was purely a miscalculation of the benefit, and there was no ambiguity in the plan provisions which governed the calculation.

The court then dismissed the negligence and negligent misrepresentation claims against the actuaries on ERISA pre-emption grounds. ERISA pre-empts state law claims like the tort claims against the actuaries where the damages sought are a claim for benefits under a pension plan. Since Congress did not create such a remedy in ERISA against plan professional like actuaries, a participant could not circumvent that statutory scheme by bring a cause of action under state law. There was a suggestion in the decision, however, that if the plaintiff solely focused her suit on a claim that the negligence of the actuaries had led the plaintiff to give up her job and caused her damage other than the loss of the higher benefit, she might be able to state a claim which would survive an ERISA preemption challenge.

New York courts treat actuaries and accountants differently

New York law is full of inconsistency when it comes to the treatment of actuaries and accountants in professional negligence suits, and it’s the accountants who get the better treatment. This was well illustrated in a recent decision from the New York Appellate Division, New York State Workers’ Comp. Bd. v. SGRisk, LLC, 2014 NY Slip Op 2373 (N.Y. App. Div., 2014).

The SGRisk case involved an appeal from decisions on a motion to dismiss in an action brought by the New York Workers Compensation Board involving certain insolvent trusts. As the entity responsible for winding up the affairs of these insolvent workers comp trusts, the Board had brought a variety of tort and contract claims against the outside professionals utilized by the trusts, namely the accountants and the actuaries.

First, the court upheld the dismissal of claims alleging negligence by the trust accountants on the grounds the claims were barred by a three year statute of limitations applicable to professional malpractice claims. Yet the court refused to dismiss similar claims against the actuaries following earlier decisions in New York holding that actuaries are not “professionals” and therefore could not get the benefit of a shorter three year statute of limitations which applied to professional malpractice claims. Instead a longer six year statute of limitations would apply to the actuaries.

The second inconsistency involves fiduciary liability. New York courts have held that accountants are not fiduciaries for their clients. Friedman v. Anderson, 803 N.Y.S.2d 514 (N.Y. App. Div., 2005). In SGRisk, after the court reiterated that actuaries are not professionals, the court went on to hold that actuaries could be fiduciaries and could be held liable for both breach of fiduciary duty and aiding and abetting breach of fiduciary duty by others.

The appellate court in SGRisk relied on these facts alleged by the plaintiffs as sufficient to be the basis for a breach of fiduciary duty:

  • The actuarial firm “held itself out as being a skilled and competent actuarial firm that adhered to accepted professional standards,” 
  • The actuarial firm “rendered services for the trusts’ benefit, provided advice and created a relationship of trust and confidence between itself and the trusts.”
  • The actuarial firm agreed to determine “appropriate valuation of the trusts’ future claims liability and the trusts reasonably relied on this, placing confidence in SGRisk that it would accurately produce truthful annual actuarial reports with correct estimates of future claims reserves”

These generic allegations would appear to apply to the services provided not just by actuaries, but by any other financial professional, including accountants. What professional service firm does not hold itself out as “skilled and competent” and that it will produce accurate work product which a client can place confidence in? Yet New York courts only apply the higher standard of fiduciary duty to actuaries and not to accountants and auditors.

This development in New York law should be compared with other jurisdictions which have rejected arguments that actuaries are fiduciaries. For example, in Chua v. Shippee (N.D. Ill., 2013), which we have previously discussed on this blog, the court rejected an argument that actuaries were fiduciaries, because there was no allegation that the client had ceded any discretionary authority or control over its affairs to the actuarial firm. The court expressly rejected arguments that allegations that actuaries gave advice which was relied upon by a pension plan was sufficient to create fiduciary status under ERISA.

In most jurisdictions, the legal doctrines governing the liability of accountants and actuaries are identical. New York courts, for whatever reason, have developed a body of law treating them separately and generating inconsistent results for very similar fact situations.

Recurring benefit payments and the statute of limitations

The First Circuit Court of Appeals held this month that the statute of limitations under ERISA for a claimed miscalculation of an ongoing stream of benefit payments started at the time of the calculation of the first payment, and was not renewed with each subsequent payment alleged to be erroneous.  

In Riley v. Metropolitan Life Ins. Co., the plaintiff claimed that his benefits under Met Life’s long term disability benefit plan had been miscalculated and that his monthly benefit was too low.  The plaintiff had rejected MetLife’s computation from the time of his first benefit payment in 2005, but (perhaps because of malpractice by his lawyers) did not bring his ERISA claim until March 2012.

The Court of Appeals upheld the dismissal of the case because it had been brought more than six years after the first benefit payment.   Riley had attempted to avoid the limitations bar by arguing that each new benefit payment where he was underpaid was a new injury and a new wrong, as well as being a continuing violation.  Riley claimed he should be able to at least collect for underpayments in six years immediately preceding his complaint and to get benefits restored to a higher level going forward into the future.  The Court, however, found that any violation of Riley’s rights had occurred when the benefits were first calculated and started to be paid, and it could not be said that a new violation occurred each and every month.

This case has potential relevance in situations where actuaries or plan administrators face claims relating to miscalculations many years in the past. The possibility of arguing that the statute of limitations began with the first payment may depend, however, on showing that the recipient disagreed with the benefit calculation at the outset in order to avoid the argument that the statue of limitations only began to run at a later point in time when the recipient “discovered” the error.

Major actuarial organizations speak out on public pension funding

Two leading organizations of the US actuarial profession issued papers in February regarding public pension plan financial reporting and the funding of public pension liabilities.   The situations facing public pension plans have had high visibility in the recent past as the contributions necessary to fund promised benefits take up an increasing percentage of state and local government budgets and as the country watches the Detroit bankruptcy where promised public pension benefits may be cut in the city’s reorganization plan.   The papers released by the American Academy of Actuaries and the Society of Actuaries attempt to present policymakers, plan sponsors, the actuarial profession and the public with reasoned discussions of the policies and economic realities which impact pension funding.  

The American Academy of Actuaries published its issue brief titled Objectives and Principles for Funding Public Sector Pension Plans.   The document talks about the need to balance three primary objectives of 

  • Benefit Security
  • Contribution Stability and Predictability, and 
  • Generational Equity

The Academy’s issue brief speaks more at a high level, explaining these objectives and how different approached to public pension plan reporting and funding methods can impact these objectives.   The issue brief does not make many specific recommendations but instead attempts to provide a context for ongoing improvement of public pensions.

The Blue Ribbon Panel of the Society of Actuaries was much more willing to make specific recommendations in its Report on Public Pension Funding.  While reciting similar objectives for pension plan funding, the Blue Ribbon Panel Report is much more a description of recommended best practices in this area, with specific recommendations for such things as asset smoothing, stress testing, funding methods, and investment risk disclosures.

The panel recognized that its recommendations were going beyond the standard of practice for public pension actuaries currently:

In addition, because there may be differences of
opinion regarding the appropriateness of funding
assumptions and methods, the Panel believes that
the actuary should opine on the reasonableness
of the selected assumptions and methods in his/
her actuarial funding report. This extends the
actuary’s duty to opine beyond today’s standards
(that assumptions and methods meet Actuarial
Standards of Practice (ASOPs)).

The Panel also believes that the current range
of funding assumptions and methods in use is
overly broad and recommends narrowing the
range of practices with respect to various funding
assumptions and methods.

The Panel requests that the Actuarial
Standards Board (ASB) actively consider the
recommendations made herein and take steps to
incorporate them into ASOPs if needed to achieve
the objectives of the Panel’s recommendations. 

Both the Academy’s Issue Brief and the Blue Ribbon Panel Report provide important contributions to the discussion of what should be done to improve public pension finances.   While these documents are not binding recommendations for anyone, they will certainly influence the development of the standard of practice for pension practitioners in the public sphere.

The NFL needs actuaries

When US District Judge Anita Brody rejected the proposed settlement of the National Football League players concussion class action lawsuit in January, she did so because there was an insufficient record in front of her regarding the potential future claims in comparison to the size of the settlement fund being established:  

I am primarily concerned that not all Retired NFL Football Players who ultimately receive a Qualifying Diagnosis or their related claimants will be paid. 6 The Settlement fixes the size of the Monetary Award Fund. It also fixes the Monetary Award level for each Qualifying Diagnosis, subject to a variety of offsets. In various hypothetical scenarios, the Monetary Award Fund may lack the necessary funds to pay Monetary Awards for Qualifying Diagnoses. More specifically, the Settlement contemplates a $675 million Monetary Award Fund with a 65-year lifespan for a Settlement Class of approximately 20,000 people. Retired NFL Football Players with a Qualifying Diagnosis of Parkinson’s Disease, for example, are eligible for a maximum award of $3.5 million; those with a Qualifying Diagnosis of ALS may receive up to $5 million. Even if only 10 percent of Retired NFL Football Players eventually receive a Qualifying Diagnosis, it is difficult to see how the Monetary Award Fund would have the funds available over its lifespan to pay all claimants at these significant award levels.

The parties are responsible for supplementing the record to provide the court with the information needed to evaluate the fairness or adequacy of a proposed settlement.

In re Nat’l Football League Players’ Concussion Injury Litig. (E.D. Pa., 2014) .

Judge Brody needed actuarial analysis —  the kind which would tell an insurance company if it was establishing a big enough reserve to fund claims which would develop to maturity over the next 65 years.   Apparently the parties had used actuaries in reaching the mediated settlement, but that evidence was not submitted to the court when approval for the class action settlement was sought.

Jan 3

Updated ASOPs for pension plans go into effect in 2014

The Actuarial Standards Board has adopted revised versions of two important actuarial standards of practice (ASOPs) for the calculation of pension plan liabilities which will go into effect in 2014.   The revised ASOPs are ASOP 4 on Measuring Pension Obligations and Determining Pension Plan Costs or Contributions  and ASOP 27 on Selection of Economic Assumptions for Measuring Pension Obligations.

From the ASB website:

ASB Adopts Revised Version of ASOP No. 4

The ASB recently adopted a revised version of ASOP No. 4, Measuring Pension Obligations and Determining Pension Plan Costs or Contributions. Key changes from the current standard include modifications to language pertaining to disclosure of funded status; disclosure of rationale for changes in cost or contribution allocation procedure; assessment of contribution allocation procedure or funding policy; prescribed assumptions or methods; and plan provisions that are difficult to measure. The adopted ASOP No. 4 was exposed twice between January 2012 and May 2013, generating a total of 30 comments. ASOP No. 4 will be effective for any work product with a measurement date on or after December 31, 2014. The final version can be viewed under the tab “Current Actuarial Standards of Practice.”

ASB Adopts Revised Version of ASOP No. 27

The ASB recently adopted a revised version of ASOP No. 27, Selection of Economic Assumptions for Measuring Pension Obligations. The second exposure draft of ASOP No. 27 was issued in January 2012 and received fifteen comment letters. As a result, various changes were made to the final standard in response to those comments including revising the section on Adverse Deviation or Other Valuation Issues to note that an actuary may determine that it is appropriate to adjust the economic assumptions when valuing plan provisions that are difficult to measure, as discussed in ASOP No. 4; and revising the Assumptions Used section to require that each significant assumption be disclosed. This standard will be effective for any actuarial work product with a measurement date on or after September 30, 2014.

Courts issue public pension decisions

State appeals courts in Louisiana and New Mexico issued decisions this week important to public pension finance.

A Louisiana appeals court held that state law requires the City of New Orleans to contribute pension funding amounts calculated by the pension system actuary.   According to the court, the City was not at liberty to put in less than the actuary’s calculation of normal cost plus an amortization payment of the unfunded liability.  This represents a fiscal challenge for financially-strapped New Orleans says NOLA.com:

Mayor Mitch Landrieu’s administration has suffered another setback in its fight over payments to the pension fund for New Orleans firefighters. An appellate court ruled Wednesday (Dec. 18) that the city is indeed on the hook for $17.5 million that the administration failed to pay into the system in 2012.

A three-judge panel with the 4th Circuit Court of Appeal upheld Civil District Judge Robin Giarusso’s ruling in March that the city must immediately pay up. That decision could fall hard on the cash-strapped city’s finances as it struggles under the costs of two federal consent decrees meant to overhaul the Police Department and the city jail.

You can read the court’s entire decision here.  

The New Mexicio legislature, in an attempt to improve the funded status of its pension plan and control funding costs, passed a bill which would reduce future cost of living adjustments.  The Supreme Court of New Mexico rejected public retirees’ challenge to those reductions:

We hold, therefore, that in the absence of any contrary indication from our Legislature, any future cost-of-living adjustment to a retirement benefit is merely a year-to-year expectation that, until paid, does not create a property right under the Constitution. Once paid, of course, the COLA by statute becomes part of the retirement benefit and a property right subject to those constitutional protections.

Bartlett v. Cameron (N.M., 2013).

We can expect more cases in the future as actuarial projections of future pension costs create a challenge for the treasuries of state and local governments.