Actuary Law

When actuarial errors cause overpayments

One type of actuarial malpractice claim involves mistakes which lead a pension plan to make payments which exceed amounts actually payable under terms of the Plan.   An example of this type of claim was highlighted in a May 30 article  about the Virginia Retirement System in the Richmond Times Dispatch.  According to this report, the actuaries for the system miscalculated a cost of living adjustment in 2009, resulting in overpayments to 120,000 retirees over the past 3 years.   The total amount overpaid was $28.7 million.

An important factor in a case like this is the ability of the Plan to recover the overpayments.   When a Plan overpays by mistake, the Plan is justified in the position that the recipients should not be entitled to keep the over-payments.   If the overpayments are repaid, the Plan has not suffered any damages.   Very often, a Plan which is making ongoing payments to retirees can recoup overpayments simply by offsetting it against some future payment to the recipient.   

This appears to be what the Virginia Retirement System has decided to do.   There are group life insurance policies on these retirees, and the VRS is attaching the claims for return of the overpayment (80% of which are under $500) to those policies.   For retirees who have already died and life insurance benefits have already been paid, the actuarial firm is going to reimburse the system.

Even if there is not a future source of payments, the actuary facing a claim like this can argue that the Plan should pursue recovery of the overpayment, even including filing suit to recover the overpayment, in order to mitigate the Plan’s damages.  

As a risk management step, an actuary can add to a contract with its pension plan client an affirmative obligation for the Plan to attempt to recover overpayments before asserting any claim against the actuary.  

Admissibility of actuarial opinion testimony

A recent decision from the Commonwealth Court of Pennsylvania does a nice job of addressing some common challenges to whether expert opinion testimony from an actuary should be admitted.  Glaze v. Workers’ Comp. Appeal Bd. (Pa. Commw. Ct., 2012).  In the case, the court was reviewing challenged actuarial evidence used to support the value of pension contributions to a defined benefit plan.   The court rejected claims that actuarial testimony had to be mathematically certain:

[T]he proper inquiry is not whether some information may differ, but whether  the  use  of  the  information  is  justified and  acceptable  within  a  reasonable  degree  of actuarial  certainty.   As to defined-benefit plans and expert testimony in general, case law does not require  certainty.  See,  e.g.,  Lach  v. Fleth, 361 Pa. 340, 64 A.2d 821 (1949) (expert opinion  in  claim  for  damages  is  sufficient  if  it affords a reasonably fair basis for calculating the plaintiff’s   loss;   it   need  not   conform to the standard of mathematical exactness).

It’s a common strategy of a party challenging actuarial evidence to poke at the underlying data and argue that any data issues must result in all the related testimony being discarded.   The court in Glaze recognized that the test should be whether the data is of sufficient quality that an actuary can render an opinion “to a reasonable degree of actuarial certainty.”

New lawsuit over actuarial assumptions

Public pension plans in California generate plenty of litigation.   A new lawsuit related to the City of San Jose public pension plan is a little bit different from most.   The suit, Mulholland v. Crosby, et. al., is filed in California Superior Court.  The plaintiffs are plan participants who claim that pension plan officials improperly hired Cheiron, Inc., an actuarial firm, to do a special study for “budgetary purposes” and then directed the firm to use outdated data and to make assumptions which varied from actual plan experience.  The lawsuit requests that the plan fiduciaries be ordered to reimburse the plan for the cost of the study out of their own pockets.   

Obviously the cost of the study is miniscule compared to the overall assets and liabilities of a sizable public pension plan.  This suit is not about the fees, but is part of budget and wage and hour disputes between City officials and public employees in a time of limited resources.

ASB issues exposure drafts for pension standards

The Actuarial Standards Board has released two exposure drafts for proposed revisions to two of the actuarial standards of practice related to defined benefit plans:  

ASOP No. 4 revision – Measuring Pension Obligations and Determining Pension Plan Costs or Contributions.

Comment deadline: May 31, 2012

ASOP No. 27 revision (second exposure) - Selection of Economic Assumptions for Measuring Pension Obligations

Comment deadline: May 31, 2012

These standards come into play in every valuation of defined benefit plan liabilities, so the changes will be important for all pension actuaries.