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The facts of Harvey are similar to many pension offset cases. Actuary Brent Mowery testified in support of the Employer’s credit where Claimant received pension pursuant to a defined benefit retirement plan. He explained the calculation used to determine the Employer’s credit amount. Claimant presented no contrary evidence and called no expert in support of his case.
In Harvey the WCJ upheld offset. The WCAB remanded the case. The Commonwealth Court reversed the Board and reinstated offset. The Supreme Court affirmed this decision.
The Court’s opinion is lengthy, at 22 pages, and provides a detailed review of the SERS administered defined benefit retirement plan. Under the plan, the amount of any particular employee pension is determined finally upon retirement. This is based on years of service multiplied by a final average salary, and discounted according to defined annual accrual and class of service factors. The Court noted even at the time of retirement, the expenses to the system and correspondingly employers in funding ongoing installments is open ended, since obviously cost is dependent on variables such as the pensioner’s longevity and future investment performance.
To determine the offset amount, SERS designed the following formula based upon advice from an actuarial firm. First, the present value of a pension is calculated by annualizing the monthly payment and multiplying it by an actuarially determined factor representing life expectancy. Secondly, actual employee contributions are then aggregated and an 8.5% assumed annual rate of interest - - the same figure utilized in the actuarial evaluations of the overall system and in determining employer’s contributions - - is added. This sum is subtracted from the total present value of the pension, yielding the present value allocated to the employer-funded component, which is converted to an annual figure by dividing the life expectancy figure, and yielding a weekly offset amount. SERS implements the formula to perform calculations in each specific case by reference to a spread sheet developed by its actuary consultant.
The Court reviewed section 204(a) of the Workers’ Compensation Act which provides “benefits from a pension plan to the extent funded by the employer directly liable for the payment of compensation which are received by an employee shall … be credited against the amount of the workers’ compensation award.” Cites section 204(a) 77 P.S. §71(a).
The Court acknowledged the esoteric nature of the issues. The Court quoted the employer’s argument and the Commonwealth’s Hensal decision that “because an appreciation of the funding of defined benefit pension plans requires knowledge beyond that possessed by lay persons, it is a subject particularly amenable to testimony by experts”.
The Court cited Amicus SDIC’s brief noting that in 2008 the SERS fund produced a 2008 return, net of fees, of -28.7 %. SDIC cited the figure in support of its argument that the foregoing performance statistics not only reveal how variable rates of return are in the short-term, but underscore the harm that such a focused approach could cause both the sponsoring employer and the injured worker who might choose to apply for his or her SERS pension during a down market.
The Court also cited Torrey & Greenberg Law & Practice §12.89 (2008):
“Because investment returns and benefit costs are ex ante uncertain, the employer contribution serve as a “balancing mechanism” designed to smooth away short falls and excesses (as the employer is ultimately liable to the employee for payment of the promised benefit”. They may be “above average in some years” and “below average in others” and neither has any impact on the benefits ultimately received by employees under a defined benefit plan. To look only at returns and employer contributions during a brief period of time ignores how pensions are administered in light of the uncertainties surrounding returns and benefit costs and ignores the fact that the employer’s obligation and contributions do not end at the employee’s retirement.”
The Court rejected Claimant’s argument that in §204(a), the legislature contemplated a precise allocation of actual, existing employer funding to specific pension accounts and, therefore, eschewed actuarial input. Claimant’s argument was that the employer must provide an exact number regarding the exact funding to a specific Claimant’s pension to support entitlement to offset. The Court noted the purpose of the §204(a) offset is to foster cost containment in the workers’ compensation insurance arena. The Court applied principals of statutory construction and found nothing to preclude the sound use of actuarial principles in evaluating employer funding in defined benefit pension plans.
The Court next determined that the testimony of employer’s expert and consultant provided substantial evidence to support the WCJ’s findings. The Supreme Court upheld the Commonwealth Court concluding that the WCJ properly credited the consultant’s testimony that the nature of a defined-benefit plan impedes direct tracing and quantification of employer funding, and that actuarial science offers a rational alternative consistent with the nature of this type of plan. Likewise, the Court concluded that acceptance of the calculation methodology was within the prerogative of the WCJ. Claimant had challenged the use of an 8.5% assumed annual rate of interest for Claimant’s contributions versus actual rate of return. Claimant had also disputed that employer actually provided substantial funding to the pension where Claimant averred employer contributed very little to the pension during the years Claimant was employed and where there is other funding from other employers and withdrawals allowing only a 4.0% rate of return. The Court stated the WCAB was not free to deviate from the existing Commonwealth Court precedent either in terms of the deferential review required relative to credibility determinations or the ability of the employer to satisfy its burden using expert testimony. Moreover, the Court noted that they did not regard the present interpretation as borderline.
Practice pointer: We recommend a careful review of cases for potential offsets. It is imperative that claims adjusters regularly send LIBC 756, Employees Report of Benefits form, at regular intervals. Independent investigation should also be conducted to determine if Claimant receives a pension, social security, or unemployment compensation. This is especially true for long term employees or employees of retirement age. As recognized by the Court, the offset rules were part of Act 57’s Cost Containment Provisions. Pension offsets do provide employer/carriers with significant cost savings.