Second Circuit Affirms Judgment in Favor of Colgate Retirees in Dispute Over Calculation of Cash Balance Pension Benefits

McCutcheon v. Colgate-Palmolive Co., No. 20-3225, __F.4th__, 2023 WL 2467367 (2d Cir. Mar. 13, 2023) (Livingston, Sack, Circuit Judges, and Cogan, District Judge (EDNY)).

Plaintiff-Appellee Rebecca McCutcheon was a participant in the Colgate-Palmolive Co.’s Employees’ Retirement Income Plan (the “Plan”), a defined-benefit pension plan, that was converted from a final-average-pay plan to a cash-balance plan in 1989. After her retirement, the Plan was amended retroactively with respect to paying and calculating accrued benefits through payment of residual annuities. McCutcheon brought a putative class action under ERISA against the plan sponsor, plan administrator, and related defendants, alleging that the plan sponsor wrongly calculated, and underpaid, accrued retirement benefits in the form of residual annuities for participants who took their benefits as a lump sum rather than as an annuity.

The district court granted summary judgment to Defendants on several counts but granted summary judgment to the Plaintiff Class on a subset of its claims. Colgate appealed the order and final judgment of the district court. The Second Circuit Court of Appeals concluded that the Plaintiffs-Appellees interpretation of the Plan is the unambiguously correct reading of the Plan’s text. The Second Circuit made the following holdings as summarized by Thomson Reuters:

1. [The] plan sponsor’s calculation of residual annuities by subtracting the value of the participant’s actual lump-sum payment, converted into a hypothetical annuity payable at age 65, from a personal-retirement-account (PRA) annuity, rather than from the greater of the PRA annuity or a grandfathered annuity, resulted in an impermissible forfeiture of benefits.
2. In calculating residual annuities, [the] plan sponsor was required to use the Pension Benefit Guaranty Corporation (PBGC) interest rate as a discount rate for valuing a participant’s actual lump-sum payment as a hypothetical annuity.
3. In calculating residual annuities, [the] plan sponsor was required to use the 20-year Treasury-bill interest rate plus 1% when calculating the value of a PRA annuity.
4. As a matter of first impression, [the] plan sponsor’s use of a pre-retirement mortality discount (PRMD) when calculating present value of lump-sum distributions for purposes of calculating residual annuities violated ERISA’s and [the] Internal Revenue Code’s actuarial-equivalence rules because, under [the] plan, a participant’s death benefit was equal to his or her pension benefit.

Judgment affirmed.