It’s a given that most of us want to extend our lives as long as possible. But our ever increasing life spans can create problems for pension funds and others that depend on us dying to keep their books balanced.

Pension funds face severe longevity risk. If pensioners live longer than expected, payouts from the funds could exceed the estimated cost of keeping the funds solvent. Worldwide, $17 trillion of pension funds – $23 trillion in assets – is exposed to longevity risk.

But the big banks—including Goldman Sachs, JPMorgan Chase, and Deustsche Bank—are coming to the rescue by packaging that longevity risk and selling it to investors; and they’re counting on investors being interested in gambling on death.

Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For previous coverage of life insurance contracts in Advisor’s Journal, see IRS Guidance Provides Safe Harbor for Policies Maturing After Age 100 (CC 10-51).

For in-depth analysis of pension plans and other qualified employee plans, see Advisor’s Main Library: O – ERISA – FAQs.

Why is this Topic Important to Wealth Managers? This blogticle provides a general lesson regarding diligence for wealth managers. That a court shall not grant the same legal weight to plan summaries as plan descriptions and documents themselves means wealth managers should look to original plan documentation. This rule should apply to all investment and insurance products and arrangements. Summaries alone will not provide a legally sufficient basis to create a contract. As such the agreement between the parties should be thoroughly examined as the binding document.

The U.S. Supreme Court recently ruled that summary plan descriptions for pension plans need not represent the full plan details and terms; the interpretation by the plan participant of the summary is legally insufficient as to create a remedy without a showing of fraud or serious harm. Thus, the Court significantly narrowed the grounds by which an employee may bring an action for additional pension benefits based on errors in a plan’s summary plan description (SPD).

The Court held unanimously that an SPD should be accurate, but it need not be as complete as the underlying plan documents, and participants cannot sue to enforce their interpretation of the SPD in the same way that they could sue to enforce the actual terms of the plan. [1]

CIGNA Corp., the pension plan sponsor involved in the case, converted a traditional defined benefit pension plan, which used a funding formula based on the assumption that an employee would spend many years at the company, into a cash balance plan. An employer that sponsors a cash balance plan simply puts in a set amount of cash each year. The amount of benefits accrued each year is the sum of the contribution and interest earnings on the contribution.

J. Amara, the lead plaintiff in the class action argued that the SPD for the new plan – the document that was supposed to describe the plan in terms that participants could understand — was misleading, because it said employees would do at least as well as in the old plan and failed to explain that a drop in interest rates could affect the ultimate benefits. The conversions however under the new plan left some participants worse off given present value calculations and assumed interest rates.

The lower courts ruled that the SPD was incomplete and inaccurate, that the participants were “likely harmed” by the inaccuracies, and that all 27,000 plan participants should share in a recovery.

However, the Supreme Court held that ERISA did not give the district court authority to reform CIGNA’s plan, but that statute does give a participant, beneficiary, or fiduciary an opportunity to seek “’other appropriate equitable relief” to redress violations of ERISA ‘ or the [plan’s] terms.’” [2]

The Court interpreted the law as allowing “equitable relief,” such as a surcharge only if SPD errors were the result of fraud or that the errors had led to serious harm.

“To make the language of a plan summary legally binding could well lead plan administrators to sacrifice simplicity and comprehensibility in order to describe plan terms in the language of lawyers,” wrote Justice Stephen Breyer in his opinion.

On the other hand, by enforcing the summaries as a binding legal agreement would likely “bring about complexity that would defeat the fundamental purpose of the summaries,” Breyer said. “For these reasons taken together we conclude that the summary documents, important as they are, provide communication with beneficiaries about the plan, but that their statements do not themselves constitute the terms of the plan.”

Tomorrow’s blog will discuss topics related to life insurance.

We invite your questions and comments by posting them below, or by calling the Panel of Experts.

[2] See generally ERISA Section 502(a)(1)(B).

Segments of this article were adopted from Lifeandhealthinsurancenews.com, Supreme Court Favors CIGNA in Summary Plan Description Case, By Arthur D. Postal. Published 5/16/2011. You can access the full article here.

The Department of Labor is looking to significantly broaden the definition of who is a fiduciary when giving investment advice to employee benefit plans and plan participants. Many plan consultants who previously escaped classification as fiduciaries will soon be subject to the conflict of interest and self-dealing rules that are applied to plan fiduciaries, creating a compliance nightmare for those advisors.

The Employee Benefits Security Administration (EBSA)—the agency of the U.S. Department of Labor responsible for administering ERISA—released proposed regulations on October 22, 2010, that will expand the reach of the plan fiduciary rules, even applying the rules to some advisors who do not advise a plan or its participants on a regular basis.  Read this complete article at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For in-depth analysis of employee benefit plans, see Advisor’s Main Library: Employee and Government Benefits.

We invite your questions and comments by posting them below or by calling the Panel of Experts.