BOSTON Dec 14 Alaska's $1.8 billion lawsuit
against Mercer accusing the consulting firm of pension
calculation errors sets the stage for a showdown between U.S.
government retirement funds and private service providers.
More lawsuits by underfunded pension funds for government
workers could be in the cards against consulting and actuarial
firms, experts say. They say the legal headaches may also lead
to a backlash from the service providers as they reexamine
the risk-reward payoffs from the business.
"I think we are going to see more of these suits and they
are going to be with even bigger pension plans than Alaska's,"
said Steven Howard, a partner at law firm Thacher Proffitt &
"It puts the servicing businesses for pension plans on
notice that they have to be very, very careful that the day in
which they would never even think of being sued by the pension
plans is over," Howard said.
The state of Alaska filed a lawsuit last week in state
superior court in Juneau, charging Mercer, a former actuary of
two state retirement plans, of mistaken assumptions and methods
about future health-care costs and basic mathematical and
technical errors in the plans.
The suit, which seeks $1.8 billion in damages, the largest
yet in a state case against consultants, said the unit of Marsh
& McLennan Cos Inc (MMC.N) also failed to assign competent,
experienced personnel to work for the plans.
Mercer said it will defend its case vigorously and said a
number of factors, including employees retiring earlier than
expected, had caused a shortfall in the funds.
But just the filing of the suit with the huge headline
number of alleged damages raised the possibility of similar
action by other state entities, analysts said.
"People are going to see that headline. Particularly
systems that are looking at surprising and disappointing news,"
said Nevin Adams, editor-in-chief of PLANSPONSOR magazine, a
publication on pensions.
"These systems don't have any other viable source for where
they are going to come up with the shortfalls. And they are
going to be looking around for deep pockets," Adams said.
The "funding ratio," or the percentage of pension assets
versus liabilities, averages 80 to 90 for major U.S. state,
city and county retirement plans, according to private sector
and government estimates.
But as in the case of the Alaska funds, which had an
unfunded liability of about $8.4 billion and total assets of
$16 billion as of mid-2006, the funding ratios of several other
state funds are also far lower than the average numbers.
These include the Oklahoma Teachers plan, with a ratio of
49.3, and the Missouri DOT and Highway Patrol plan, with 55.5,
as of end-June 2006, according to the National Association of
State Retirement Administrators.
And the underfunding could worsen if markets sour in the
aftermath of the credit market turmoil.
"Bad financial markets, just like bad earnings from Enron,
are going to lead to litigation," said John Bogle, founder of
money manager Vanguard Group.
Actuaries use mathematics, statistics and financial theory
to help pension funds estimate their future liabilities.
CalPERS, the largest U.S. public pension fund with $260
billion in assets, employs 16 professional actuaries in-house
but smaller public funds get the work done externally.
Besides Mercer, Milliman Inc and Towers Perrin are among
the handful of big firms that provide actuarial services. Like
lawyers, actuaries charge fees based on hourly rates, making
some question if the risk of getting slammed with a
multimillion dollar suit is worth the revenues.
"It's going to come to pass that these public entities, if
the big actuarial consulting firms back-off, are going to be
left with two actuaries working out of their garage with
absolutely no liability cover whatsoever. And that's what you
are going to get," said an official from an actuarial firm, who
asked not to be identified.
The service providers have been preparing for this
scenario. Edward Siedle, founder of pension consultant
Benchmark Financial Services, said some actuarial firms have
struck deals with clients limiting their liability to the fees
But some analysts questioned the legal standing of such
The judiciary is also more receptive to cases involving
pension assets, said Howard of Thacher Proffitt.
"Judges now are becoming more and more aware of the
vulnerability of pension assets to what they believe are
circumstances which harm the pension plan," he said.
Howard also said litigation in the pension industry would
mirror the pattern in the $12.4 trillion U.S. mutual fund
industry where, culminating in the trading scandals of
2002-2004, suits against service providers were filed for
violation of fiduciary responsibilities.
"Service providers were held accountable and now you will
see a similar pattern developing in the pension plan business,"
(Editing by Richard Chang)