ERISA – Pensions

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7^th Circuit Court of Appeals

Case Name: James P. Teufel v. The Northern Trust Company, et al.,

Case No.: 17-1676; 17-1677

Officials: WOOD, Chief Judge, and BAUER and EASTERBROOK, Circuit Judges.

Focus: ERISA – Pensions 

In 2012 Northern Trust changed its pension plan. Until then it had a defined-benefit plan under which retirement income depended on years worked, times an average of each employee’s five highest-earning consecutive years, times a constant. Example: 30 years worked, times an average high-five salary of $50,000, times 0.018, produces a pension of $27,000. (We ignore several wrinkles, including an offset for Social Security benefits, a limit on the number of credited years, and a limit on the maximum credited earnings.) The parties call this the Traditional formula. As amended, however, the plan multiplies the years worked and the high average compensation not by a constant but by a formula that depends on the number of years worked after 2012. The parties call this arrangement the new PEP formula, and they agree that it reduces the pension-accrual rate. (There is also an old PEP formula, in place between 2002 and 2012, for employees hired after 2001; we ignore that wrinkle too.) Recognizing that shifting everyone to the new PEP formula would unsegle the expectations of workers who had relied on the Traditional formula, Northern Trust provided people hired before 2002 a transitional benefit, treating them as if they were still under the Traditional formula except that it would deem their salaries as increasing at 1.5% per year, without regard to the actual rate of change in their compensation.

James Teufel contends in this suit that the 2012 amendment, even with the transitional benefit, violates the anticutback rule in ERISA, the Employee Retirement Income Security Act. 29 U.S.C. §§ 1001–1461. He also contends that the change harms older workers relative to younger ones, violating the ADEA, the Age Discrimination in Employment Act. 29 U.S.C. §§ 621–34. The district court dismissed the suit on the pleadings, 2017 U.S. Dist. LEXIS 31674 (N.D. Ill. Mar. 6, 2017), and Teufel appeals. The Northern Trust pension plan, both before and after the 2012 amendment, complies with §623(i). Benefits depend on the number of years of credited service and the employee’s salary, not on age. Because salary generally rises with age, and an extra year of credited service goes with an extra year of age, the plan’s criteria are correlated with age—but both Kentucky Retirement Systems and Hazen Paper hold that these pension criteria differ from age discrimination. An employer would fall outside the §623(i) safe harbor if, for example, the amount of pension credit per year were a function of age rather than the years of credited service, or if pension accruals stopped or were reduced at a firm’s normal retirement age. See 29 U.S.C. §623(i)(1). Stopping pension accruals at age 65 used to be a common feature of definedbenefit plans. Under §623(i)(1)(A) that is no longer lawful. The Northern Trust plan, however, allows accruals past the normal retirement date, and accruals do not otherwise depend on age. Because the plan complies with §623(i), it satisfies the ADEA.

Affirmed

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Attorney Derek A. Hawkins is the managing partner at Hawkins Law Offices LLC, where he heads up the firm’s startup law practice. He specializes in business formation, corporate governance, intellectual property protection, private equity and venture capital funding and mergers & acquisitions. Check out the website at www.hawkins-lawoffices.com or contact them at 262-737-8825.