Actuaries Under Scrutiny On Pension Fund Pacts
By Mary Williams Walsh
The Department of Justice has asked several big actuarial firms for information about the terms of their client agreements, in what appears to be an effort to learn whether certain provisions violate antitrust laws.
Officials of the actuarial firms said they had received "civil investigative demands," or written requests for information that fall short of subpoenas, from the department's antitrust division.
The letters seek documents and other information related to the firms' decisions, about two years ago, to ask their pension fund clients to sign clauses limiting their ability to sue the firms. The inquiry was reported this week by Pensions & Investments, a trade publication.
Officials of Towers Perrin, Milliman USA, Watson Wyatt Worldwide and Hewitt Associates said their firms had received the letters and were complying. Some of the officials said they believed that other firms had also been asked for information. The Justice Department did not respond to a call requesting information.
Almost all American pension funds, public and private, began to have serious financial difficulties in 2001. Much of the trouble was caused by unusually adverse financial market conditions, which persisted for several years. But in some cases, retirees or others connected with the pension funds have contended that the actuaries who advised the funds added to the trouble, by making errors in judgment or in calculations.
As most pension funds continued to weaken in 2002, some actuarial firms began asking their clients to accept limits on their ability to sue. Some firms asked their pension fund clients to sign letters agreeing to resolve any disputes through binding arbitration, or to limit the amount of damages they would seek in a lawsuit.
Some set deadlines and warned that pension funds that did not sign the agreements would be dropped. Pension funds that carried higher levels of risk might be allowed higher limits on liability, but they would also be required to pay more for their actuaries' "errors and omissions" insurance.
The liability limits, at a time of increasing legal activity, stirred controversy in the pension industry and have apparently raised questions about whether the actuarial firms colluded in setting the limits. Some firms asked pension officials to limit any legal claims to amounts in the low millions, while a big corporate pension fund typically has billions of dollars' worth of obligations to the work force, and a state pension plan can have tens of billions of dollars.
Some pension officials, particularly trustees of public and union pension funds, said they did not want to sign away their right to sue.
As a result, some small actuarial firms saw a competitive opportunity. They could woo clients away from the big, established actuarial firms by accepting full liability. Officials at some of the larger actuarial firms said that as a practical matter, trial lawyers would not want to sue the small firms, because they lacked significant resources to pay damages.
More recently, the liability limits have been linked to the practice of self-insuring for errors and omissions coverage. Four big actuarial firms - Watson Wyatt, Milliman USA, Towers Perrin and Buck Consultants, which is now a unit of the Mellon Financial Corporation - created a captive insurer in 1987 called Professional Consultants Insurance Corporation.
The insurance pool appears to have operated without incident for a number of years. But recently, as pension funds have faltered and litigation has intensified, actuarial firms that were cooperating in the insurance pool have found themselves on opposing sides.
When Towers Perrin was sued by the Los Angeles County pension fund, for instance, over suspected errors totaling $1.1 billion, Milliman USA was brought in to audit the books.
Milliman identified what appeared to be erroneous calculations, according to a person close to the proceedings. But Milliman could not testify against Towers Perrin without harming its own interest in the insurance pool, the person said, forcing it to become a hostile witness.
The Los Angeles County lawsuit was settled last year for undisclosed terms.