UPDATE 1-Alaska, Mercer settle pensions lawsuit

Fri Jun 11, 2010 9:56pm EDT

* Mercer does not admit wrongdoing as part of settlement

* Mercer says $100 mln of settlement covered by insurance

By Yereth Rosen and Elinor Comlay

ANCHORAGE, Alaska/NEW YORK, June 11 (Reuters) - Consulting business Mercer, owned by Marsh & McLennan (MMC.N), agreed to pay $500 million to Alaska to settle a lawsuit over the state's unfunded employee pension plans, Mercer and Alaska's Attorney General Daniel Sullivan said on Friday.

The state had sought as much as $2.8 billion in a lawsuit, first filed in December 2007, that accused Mercer of making several errors in calculating employee pension and health-care obligations.

"We think this is a fantastic settlement," Sullivan said in an Anchorage news conference. "This is, as far as we know, by far the largest actuarial settlement that has occurred in the country."

Most of the proceeds from the settlement will be funneled into its pension funds, with almost $100 million going to pay legal costs, Sullivan said.

In a separate statement, Mercer said $100 million of its payout to the state will be covered by insurance.

Mercer did not admit any wrongdoing as part of the settlement, Sullivan said.

"You look at the amount (of the settlement), I think in many ways it speaks for itself," Sullivan said.

The payment is due in 60 days, he said.

The lawsuit, filed by the Alaska Retirement Management Board on behalf of the state's two largest public-employee pension systems, accused Mercer of engaging in actuarial misconduct, breach of professional duty and breach of contract. The original complaint sought $1.8 billion, but an amended complaint filed last year accused Mercer of deliberately concealing its errors and boosted the state's claim to $2.8 billion.

The case was scheduled to go to trial in Juneau on July 6.

"I believe we had a very strong case against Mercer. But trials, as you know, have risks," Sullivan said.

Alaska's unfunded pension liability totals about $8.9 billion, Assistant Attorney General Mike Barnhill said at the news conference.

Mercer's conduct was only part of the reason why the unfunded liability grew so large, Sullivan said. Financial market losses and the rapid escalation of medical costs are other reasons for the pension problems, he said.

The state hired law firm Paul, Weiss, Rifkind, Wharton & Garrison as outside counsel. (Reporting by Yereth Rosen and Elinor Comlay; editing by Carol Bishopric)