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.