Dennison v. Mony Life Retirement Income Security Plan for Employees

In the

United States Court of Appeals

For the Seventh Circuit

No. 12-2407

JOHN J. D ENNISON, on behalf of himself and

all others similarly situated,

Plaintiff-Appellant,

v.

MONY L IFE R ETIREMENT INCOME S ECURITY P LAN

FOR E MPLOYEES, et al.,

Defendants-Appellees.

Appeal from the United States District Court

for the Western District of Wisconsin.

No. 3:10-cv-338-bbc—Barbara B. Crabb, Judge.

A RGUED JANUARY 18, 2013—D ECIDED M ARCH 6, 2013

Before P OSNER, F LAUM, and S YKES, Circuit Judges.

P OSNER, Circuit Judge. The district court certified this

ERISA suit as a class action, dismissed one of the

two claims in the suit, and granted the defendants’

motion for summary judgment on the other one. The

plaintiff appeals, raising issues of plan interpretation

and also complaining about the district judge’s refusal to

2 No. 12-2407

allow him to conduct discovery to determine whether

the plan’s rejection of his claim was motivated by a

conflict of interest. The only class member about whom

there is information in the appellate record is the plaintiff.

He left MONY (Mutual of New York Insurance Com-

pany, now a subsidiary of AXA), where he had been

employed in a senior position, in 1996. While employed

there he had participated in two retirement plans. One was

the Retirement Income Security Plan for Employees, which

the parties call “RISPE”; it is a tax-qualified defined

benefits pension plan; that is, it guarantees specified

retirement benefits and provides favorable tax treatment

both to the employer, who funds the plan, and the plan

participants. The other plan was the Excess Benefit Plan

for MONY Employees, which the parties call the “Excess

Plan.” It too is a defined benefits pension plan, but it is

an unfunded one—that is, the benefits are paid directly

by the employer rather than by a trust established and

funded by the employer, and there are no special tax

advantages. Such plans, which are intended for highly

compensated employees, are referred to colloquially as

“top hat” plans. Comrie v. IPSCO, Inc., 636 F.3d 839,

840 (7th Cir. 2011); In re New Valley Corp., 89 F.3d 143, 148-

49 (3d Cir. 1996).

Both plans entitled the plaintiff to begin receiving the

benefits promised by them when he turned 55, which

he did in 2009. And both gave him a choice, to be made

then, between taking his benefits in the form of a “straight

life” annuity—a fixed monthly payment for the rest of

his life—and taking them as a lump sum. The lump

No. 12-2407 3

sum form was represented to be the actuarial equivalent

of the annuity.

To determine actuarial equivalence requires two spec-

ifications. The first is an estimate of how long the recipient

is likely to live (an estimate not challenged by either side

in this case) and therefore for how long he would be

likely to receive the monthly annuity payment if he

chose the annuity rather than the lump sum. The

second requirement is a discount rate to apply to the

projected annuity payments. A discount rate is an

interest rate used not to determine how an investment

will grow but instead to calculate the present value of

a future receipt. If (to take a simple example of how

discounting to present value works) you expect to

receive $100,000 20 years from now and you want to

know what that’s worth today and you think that

interest rates over the next 20 years will be 6 percent,

you can by using a present-value calculator discover that

the present value of that expected future payment is

$31,180.47. That is the amount that, invested at 6 percent

interest compounded annually, will grow to $100,000 in

20 years. The lower the assumed interest rate, the more

slowly the investment will grow and hence the higher

the present value—the lump sum equivalent. At a

10 percent rate the present value of $100,000 in 20 years

is only $14,864.36, while at 3 percent it would be

$55,367.58. The dispute in this case is over the discount

rate that the plan used to calculate the lump sum equiva-

lent of the annuity—$1,888.46 a month—that the plain-

tiff was entitled to begin receiving when he turned 55.

4 No. 12-2407

When in 2009 the plaintiff became eligible to begin

receiving benefits, he told MONY (as we’ll refer collec-

tively to the defendants, which include besides the insur-

ance company the two pension plans in which the

plaintiff participated and their administrators) that he

wanted lump sums. So MONY cut him two checks.

One was his RISPE lump sum, $325,054.28 (which

happens to have been $10,000 less than his annual salary

in his last year as an employee of MONY), and the other

his Excess Plan lump sum, $218,726.38. The discount

rate that the plan used to calculate his lump sum

RISPE benefits was a blended rate called a “seg-

ment rate,” 26 U.S.C. § 417(e)(3)(C), of roughly 5.24 per-

cent. A segment rate is an interest rate calculated

by the Treasury Department on the basis of investment-

grade corporate bond rates. The details of the calcula-

tion are irrelevant to the appeal and the exact segment

rate used by MONY in calculating the plaintiff’s

RISPE benefits is not in the record and is not a subject

of dispute between the parties. The discount rate

that MONY used to determine the plaintiff’s Excess

Plan lump sum was 7.5 percent.

The plaintiff contends that the discount rate required by

both plans was a rate computed by the Pension Benefit

Guaranty Corporation on the basis of annuity premiums

charged by insurance companies. Applied to the plain-

tiff’s lump sums under the two plans, this rate, called the

“PBGC rate,” would have been only 3 percent—less

than half the average of the two discount rates that the

plan used; and remember that the lower the discount

rate, the greater the lump sum. (If the discount rate

No. 12-2407 5

were zero, the lump sum would be simply the sum of the

participant’s predicted future benefits.) Oddly, we

haven’t been told how much greater the lump sums to

which the plaintiff would be entitled (let alone the

lump sums to which the other thousand or so members

of the certified class would be entitled) would be if the

lower discount rate were used. But as our numerical

example indicated, the lump sums would undoubtedly

be much greater.

When the plaintiff left MONY’s employ in 1996, the

RISPE plan provided that the discount rate would be the

PBGC rate as of 120 days before the lump sum was due

to be paid; and that rate turned out as we just said to be

3 percent. The Excess Plan did not specify a rate but as

we’ll explain it almost certainly was 7.5 percent, the rate

the plan used.

A decade later, Congress, in the Pension Protection Act

of 2006, Pub. L. 109-280, 120 Stat. 780, authorized plan

sponsors to increase a plan’s lump sum discount rate by

amendment to the plan, and to make the increase retroac-

tive if they wanted. See sections 302 and 1170 of the Act,

120 Stat. 920-21, 1063. Before the Act took effect, such a

retroactive increase in the discount rate (and thus reduc-

tion in the size of the lump sum) would have violated

ERISA’s anti-cutback provision. 29 U.S.C. § 1054(g).

The Pension Protection Act changed this but did (also

in section 302) place a ceiling on retroactive rate

increases for tax-qualified plans: the ceiling is the

segment rate mentioned earlier. The ceiling is inap-

plicable to the Excess Plan because it is not tax-qualified.

6 No. 12-2407

In 2009, three years after the Pension Protection Act

was passed and shortly before the plaintiff turned 55

and thus became entitled to begin receiving his retire-

ment benefits, MONY raised the RISPE discount rate to

the segment rate. The rate that MONY used to compute

the plaintiff’s benefits under the Excess Plan remained

at 7.5 percent.

MONY could lawfully change the RISPE discount rate

retroactively only if the plan authorized such an amend-

ment. A plan is not required to do that, and it can if it

wants promise not to, thereby creating a “contractual anti-

cutback” rule that is enforceable like any other plan

provision. Kemmerer v. ICI Americas Inc., 70 F.3d 281, 288-89

(3d Cir. 1995). The Pension Protection Act provides an

out only with respect to the statutory anti-cutback rule.

The RISPE plan in force when the plaintiff left MONY

states that the pension rights of an employee who left on

or before the effective date of a particular amendment

to the plan “shall be determined solely under the terms

of the Plan as in effect on the date of his or her termina-

tion of employment or retirement . . . unless [the amendment

is] made applicable to former Employees” (emphasis added).

So the plan did allow MONY to amend it to change

the discount rate retroactively. But the plan also pro-

vides “that no amendment shall . . . reduce the Accrued

Benefit of any Participant.” The plaintiff was a plan

participant and his benefit had “accrued” back in 1996,

when he left the company. But “Accrued Benefit” is a

defined term in the plan—defined as “the value of a

Participant’s Retirement Benefit expressed as a Straight-

No. 12-2407 7

Life Annuity determined according to the terms of the

Plan.” “Retirement Benefit” is another defined term: it

“means a benefit payable on the dates, in the forms”

specified in a section of the plan that under the heading

“Optional Forms” allows the participant to choose a

lump sum “in lieu of the Normal Form,” which is the

straight-life annuity.

We interpret these provisions to mean that

the Accrued Benefit—that which cannot be reduced

retroactively by amendment—is the annuity, and that

the lump sum, while a Retirement Benefit, is not the

Accrued Benefit and therefore can be reduced retroac-

tively. The term “Retirement Benefit” encompasses all

forms of benefits payment that a participant can choose,

including the lump sum option that the plaintiff chose

in lieu of the annuity. See Call v. Ameritech Management

Pension Plan, 475 F.3d 816, 820-21 (7th Cir. 2007). Nothing

in the plan forbids retroactively amending the discount

rate used to calculate the lump sum benefit if the par-

ticipant chooses the lump sum in preference to the annuity.

The plaintiff cites our decision in Call as authority

for interpreting “accrued benefit” (that which under

the terms of the MONY plan can’t be changed retroac-

tively) to include a lump sum “retirement benefit.” But

the plan in Call had not defined “accrued benefit.” And

the issue in that case was not whether a lump sum

pension benefit was excluded by the term “accrued bene-

fit” but whether an early-retirement benefit, regardless

of the form it took, was excluded by the term.

So the plaintiff’s complaint about his RISPE benefit

fails, but what about the lump sum he received as a

8 No. 12-2407

participant in the Excess Plan? That plan isn’t mentioned

in RISPE. The Excess Plan is very short—eight pages,

compared to RISPE’s more than a hundred pages—and

incorporates many provisions of the longer plan by ref-

erence. It does not specify a discount rate, as we men-

tioned. But it provides that benefits “shall be paid . . . in

accordance with an automatic payout provision of the

Retirement Plan.” In the definitions section of the Excess

Plan we learn that “Retirement Plan” means RISPE. The

parties agree that this is a directive to look to RISPE for

guidance to what discount rate to use to calculate

lump sum benefits under the Excess Plan. But RISPE

doesn’t specify an interest rate for computing lump

sum benefits under the Excess Plan. What it says (in

section 1.3(a)) is that “for purposes of determining

lump sum distributions and for all other payment

forms subject to [Internal Revenue] Code Section

417(e)”—that is, for tax-preferred plan payments—the

“applicable interest rate shall be the interest rate

prescribed by the Secretary of the Treasury under Code

Section 417(e),” and that is the segment rate. But section

1.3(c) of RISPE provides that “for all other purposes

under the Plan” the discount rate is “7.5 percent per

year compounded annually.”

So the question is whether the reference to “lump

sum distributions” in section 1.3(a) includes benefits

under the Excess Plan. If not, section 1.3(c) governs and

the discount rate applicable to the Excess Plan is the

“for all other purposes” rate of 7.5 percent. The latter is

undoubtedly the correct reading because section 1.3(a)

No. 12-2407 9

is limited to benefits from tax-preferred plans and

the Excess Plan is not tax preferred.

The clincher to this interpretation is the plan admin-

istrators’ consistent, unchallenged practice over many

years of using the 7.5 percent figure to calculate lump

sum benefits under the Excess Plan. When the con-

sistent performance of parties to a contract accords with

one of two alternative interpretations of the contract,

that’s strong evidence for that interpretation. This is a

general principle of contract interpretation rather than a

provision of ERISA, 2 E. Allan Farnsworth, Farnsworth on

Contracts § 7.13, pp. 329-30 (3d ed. 2004); Restatement

(Second) of Contracts, § 202, comment (g) (1981), but it is a

principle that is applied in the interpretation of ERISA

plans. See Gallo v. Amoco Corp., 102 F.3d 918, 920-22 (7th

Cir. 1996); McDaniel v. Chevron Corp., 203 F.3d 1099, 1113-

14 (9th Cir. 2000); Allen v. Adage, Inc., 967 F.2d 695, 702-03

(1st Cir. 1992); Schultz v. Metropolitan Life Ins. Co., 872

F.2d 676, 679-80 (5th Cir. 1989).

And it’s no surprise that the discount rate in the

Excess Plan should be as high as it is. “Top hat” plans

provide gravy for highly compensated employees, and

one expects them to be less risk averse than other em-

ployees, hence more likely to prefer taking their benefits

in a lump sum, which they can invest in risky ventures

with a high expected return—financial risk and return

being positively correlated. If interest rates turned out

to exceed the discount rate in the plan, the lump sum

generated by the plan rate would confer a windfall on

the participant, for remember that the lower the dis-

10 No. 12-2407

count rate, the larger the lump sum, which the recipient

can invest at whatever current interest rates are. MONY

minimizes its exposure by fixing a high discount rate,

which both reduces the size of its lump sum outlays

and encourages plan participants to choose the annuity

over the lump sum option, since, the smaller the lump

sum relative to the annuity, the more attractive the

annuity is.

That leaves for decision only the plaintiff’s claim to

be allowed discovery to determine whether a conflict of

interest vitiates the rejection of his interpretation by

the plans’ benefits appeals committee. He thinks it suspi-

cious that the committee upheld the ruling, initially

made by a benefits administrator, on a ground different

from the administrator’s. There is nothing suspicious

about such a sequence (which is common in adjudica-

tion) if the committee’s ground is valid. But he also

points out that the RISPE plan was having financial

troubles in 2009 (unsurprisingly, given the state of the

economy then), which required MONY to make

additional contributions to the plan. And because the

Excess Plan is not funded at all, the benefits payable

under it come directly out of the company’s pocket

rather than out of a trust fund. At the oral argument the

plaintiff’s lawyer told us that MONY’s liability to the

class if the class action is successful would be in

the neighborhood of $10 million—a large sum, though

we haven’t been told the size of either RIPSE or the

Excess Plan, and MONY’s parent company, AXA,

manages $450 billion in assets and has $18 billion in

equity. See Axa Equitable, 10-Q Consolidated Balance Sheet,

No. 12-2407 11

September 30, 2012, www.sec.gov/cgi-bin/viewer?action=

view&cik=727920&accession_number=0001193125-12-

462659 (visited Feb. 19, 2013).

The plaintiff wants as a first step to see the minutes of

the meeting at which the committee voted to deny his

claims. But his lawyer made clear at oral argument that

if he received them this would be followed by his

deposing the committee’s members.

We do not think that benefits review officers should

be subjected to extensive discovery on a thinly based

suspicion that their decision was tainted by a conflict of

interest. There is a latent conflict of interest any time

someone is asking for money from a company (from

anyone, in fact), though it is muted to an extent if the

party asking is an employee or former employee, since

good relations with employees are a corporate asset.

Marrs v. Motorola, Inc., 577 F.3d 783, 787 (7th Cir. 2009).

Formal adjudicators, such as judges, jurors, arbitrators,

administrative law judges, and members of appellate

boards of agencies, are largely insulated by immunity

doctrines from interrogatories and depositions aimed

at finding evidence of conflicts of interest. Informal

adjudicators, such as members of a pension fund’s

benefits review committee, have a legitimate claim to a

degree of similar protection from discovery, used so

often as a form of harassment. Courts are drowning in

discovery; imagine the burdens, not only on them but

on employers, of discovery requests that must be

complied with every time there is a colorable claim

that private pension or welfare benefits were wrongly

12 No. 12-2407

denied. Especially in a class action suit with a thousand

or more class members, the burdens on the benefits

review process of discovery in search of evidence of

a conflict of interest could be considerable.

Moved by such concerns we held in Semien v. Life Ins. Co.

of North America, 436 F.3d 805, 815 (7th Cir. 2006), that

discovery in a case challenging the benefits determina-

tion of plan administrators is permissible only in “excep-

tional” circumstances—circumstances in which the claim-

ant can “identify a specific conflict of interest or instance

of misconduct” and “make a prima facie showing that

there is good cause to believe limited discovery will

reveal a procedural defect.” The continued validity of

that holding has been questioned, however, see, e.g.,

Gessling v. Group Long Term Disability Plan for Employees

of Sprint/United Mgmt. Co., 1:07-cv-483-DFH-DML, 2008

WL 5070434 (S.D. Ind. Nov. 26, 2008), in light of the

Supreme Court’s decision, subsequent to Semien, in Metro-

politan Life Ins. Co. v. Glenn, 554 U.S. 105 (2008).

Glenn is not about discovery, but it implies a role for

discovery in judicial review of benefits determinations

when a conflict of interest is alleged. Murphy v. Deloitte

& Touche Group Ins. Plan, 619 F.3d 1151, 1161-64 (10th

Cir. 2010). How big a role is the question. We have inter-

preted the Supreme Court’s opinion to mean that “the

likelihood that the conflict of interest influenced the deci-

sion [of the plan administrator] is . . . the decisive con-

sideration” in whether to uphold a decision “that

might just as well have gone the other way.” Marrs

v. Motorola, Inc., supra, 577 F.3d at 789 (emphasis in origi-

No. 12-2407 13

nal). In other words, while “the correct standard of

review to be applied [if the plan delegates interpretive

authority to the plan administrator] . . . remains [after

Glenn] the arbitrary and capricious standard, . . one of the

factors that must be taken into account in applying that

standard is any conflict of interest.” Fischer v. Liberty Life

Assurance Co., 576 F.3d 369, 375 (7th Cir. 2009). And to

determine the likelihood and gravity of a conflict of

interest might require discovery to “identify a specific

conflict of interest or instance of misconduct,” a task of

identification that in Semien we said was a prerequisite to

discovery, not a goal of discovery.

These cases suggest a softening, but not a rejection, of

the standard announced in Semien; and there can be no

doubt that even when some discovery is necessary in

a particular case to explore a conflict of interest, trial

courts retain broad discretion to limit and manage dis-

covery under Rule 26 of the civil rules.

With the case law in flux, this is not the occasion for

our trying to trace out the contours of permissible dis-

covery under ERISA. The reader may have noticed that

in discussing the plaintiff’s claim to be entitled to the

lower discount rate, we said nothing about deferring to

the benefits committee’s decision; we sang no hosannas

to discretion. We treated the claim as if it were a claim

of breach of contract that had been rejected by a

district court and was being reviewed by us de novo. We

had no occasion to defer to a plan administrator’s deter-

mination with which we might disagree—the only situa-

tion in which a deferential standard of judicial review

bites. For we agreed with it.

14 No. 12-2407

The plaintiff could argue that if discovery were permit-

ted and turned up evidence of a conflict of interest

serious enough to vitiate the decision of the benefits

appeals committee, he would be entitled to a further

hearing. But a hearing before whom? Any committee

composed of plan officials would have the same conflict

of interest. The plaintiff would want the district court

to conduct the hearing. In other words, he would want

to convert this to a straightforward breach of contract

case. And he would want us to review the district

court’s decision de novo. Well, that’s what we’ve done;

and we’ve concluded that even under that favorable (to

the plaintiff) standard of review, which gives no weight

to the decision of the benefits appeals committee, the

committee’s ruling must stand.

A FFIRMED.

3-6-13