Following a wave of high‑profile settlements involving large defined benefit pension plans, including Raytheon (which settled for around $59 million) and CITGO (which settled for around $10 million), and as they await litigation outcomes in pending MetLife and Southern Company Services cases, now is a good time for employers and others sponsoring defined benefit pension plans to review their plan’s actuarial assumptions to determine whether they cross the line from permissible to legally vulnerable.

The Eleventh Circuit’s recent decision in Drummond v. Southern Company Services highlights growing litigation risk for defined benefit pension plans that rely on outdated “legacy” actuarial assumptions, particularly outdated interest rates.

Key takeaways for plan sponsors of defined benefit pension plans from Drummond v. Southern Company Services:

• Reasonableness standard: Courts will scrutinize whether actuarial assumptions reflect what a reasonable actuary would use today, not just what is written in the plan.
• Interest Rates are the Primary risk driver: Litigation is focusing more on interest rates than mortality tables, as outdated higher interest rates can materially reduce the present value of a participant’s benefits.
• Aging assumptions: Pre‑1980s tables and fixed interest rates tied to older economic conditions are increasingly difficult to defend. Even if a plan sponsor’s currently active defined benefit pension plan has new assumptions built into the plan document, separate legacy plans that have been frozen and legacy plans that have been merged into the current plan still often retain decades-old tables and fixed interest rates.
• Litigation trend: A wave of class actions is targeting actuarial equivalence calculations, especially where benefits are lower than values under Internal Revenue Code (“IRC”) §417(e).

Recommended actions for plan sponsors of defined benefit pension plans:

• Conduct a privileged review with actuaries and legal counsel to assess the reasonableness of your plan’s existing actuarial interest rates and mortality table terms and any legal risks that may potentially exist.
• Consider updating your plan document to incorporate by reference the IRC §417(e) mortality and interest rates. These rates are dynamic and self-updating, since revised numbers are published each year.  Note that this change may require the inclusion of certain grandfathering protections that provide a 'better off" outcome in order to avoid violating the anti-cut back rule under IRC §412(d).
• If you will retain your own plan-specific assumptions, implement a periodic formal review and governance process, including:
  • Update plan retirement committee charters to require a periodic review be conducted every 3-5 years with the plan's actuary to determine if any updates are needed to the plan's actuarial assumptions; and
  • Document your retirement committee's periodic review with a report from the plan’s actuary that includes findings and recommendations, and summarize your retirement committee’s determinations in meeting minutes.

Bottom line:

Plan sponsors should proactively review the actuarial assumptions currently being used in their defined benefit pension plans, with a particular focus on  interest rates, and update their assumptions as appropriate in order to mitigate the rising ERISA litigation risk following Drummond v. Southern Company Services.

The Nelson Mullins Employee Benefits Group is ready to assist with questions or compliance steps. Please contact one of our Employee Benefits attorneys or the Nelson Mullins attorney with whom you work.