Citgo settlement emphasizes the need for retirement benefits

A recent $10 million proposed settlement reached between Citgo Petroleum Corporation and a group of its retired employees has highlighted the ongoing legal and financial stakes in retirement plan management.

The lawsuit, brought by retirees receiving benefits under Citgo’s defined benefit pension plan, alleges that the company relied on outdated mortality tables and interest rate assumptions when calculating pension payouts.

Plaintiffs argued these assumptions led to significantly lower benefits for those who opted for joint-and-survivor annuities, which provide continued payouts to a surviving spouse after the plan participant’s death.

Citgo’s $10M settlement needs an update

The lawsuit pointed out that Citgo’s actuarial assumptions were based on mortality data from 1971, a period that doesn’t accurately reflect current life expectancy trends, especially given the advances in healthcare and overall life longevity since that time.

Additionally, the plaintiffs contended that Citgo’s assumed interest rate was out of sync with modern investment returns, resulting in a potential shortfall for participants who had selected dual-life options.

For Citgo, agreeing to a $10 million benefit increase represents a significant financial commitment, which the company hopes will resolve the litigation and prevent a drawn-out court case. Citgo’s settlement serves as a wake-up call to other organizations, many of whom are watching closely as the case underscores the importance of accurate actuarial assumptions in determining fair benefit amounts.

Defined benefit plans calculate pensions based on specific financial and demographic assumptions, and small errors or outdated metrics in these calculations can lead to substantial shortfalls over time.

Court decisions in ERISA litigation

The Citgo case is part of a growing wave of legal challenges under the Employee Retirement Income Security Act (ERISA), a law that governs retirement plans in the private sector. ERISA mandates that plan administrators act in the best interest of participants and provides guidelines around funding, transparency, and fair payout practices.

However, it has not always been clear whether ERISA explicitly requires companies to use “reasonable” actuarial assumptions, which has led to varying interpretations in different cases.

In the Citgo case, the company argued that ERISA did not mandate updated actuarial assumptions, asserting that their calculations were based on longstanding, albeit older, metrics.

This argument was recently seen in a similar lawsuit involving Partners Healthcare Systems, Inc., in which the court ruled in favor of the company, dismissing the case on the grounds that ERISA’s standards for actuarial assumptions are open to interpretation.

However, in Citgo’s situation, a U.S. court took a different approach, rejecting Citgo’s bid for summary dismissal and allowing the case to proceed as a class action.

In June 2024, the court largely ruled against Citgo’s request for summary judgment, giving the plaintiffs the right to pursue the claim on behalf of a class of participants. The decision raised questions about the extent of ERISA’s requirements, marking a shift in the legal landscape that could impact other defined benefit plan sponsors.

Citgo’s decision to settle, instead of pursuing further legal defenses, also aligns with a trend among corporations facing high-stakes ERISA cases; these companies often settle rather than risk lengthy litigation, given the unpredictable nature of court rulings on actuarial equivalence.

Financial impact of the settlement

Defined benefit pension plans calculate retirement payouts based on assumptions about factors such as life expectancy, mortality rates, and expected investment returns. These actuarial assumptions are critical to determining fair monthly payouts, particularly for joint-and-survivor annuities, which provide benefits to spouses if the primary beneficiary passes away.

Single-life annuities generally offer higher monthly payouts because they end with the participant’s death, whereas joint-and-survivor annuities account for the added longevity risk of a surviving spouse, often resulting in lower monthly amounts but longer payout periods.

In Citgo’s case, outdated mortality and interest assumptions in the plan resulted in lower monthly benefits for participants opting for dual-life payouts. The plaintiffs estimated total financial losses at around $31 million. Although Citgo’s settlement of $10 million represents a smaller figure, it is a notable financial obligation.

The settlement highlights the potential liabilities faced by plan sponsors, especially those who have not updated assumptions to align with recent mortality and investment data.

The case is also noteworthy as it aligns with other recent settlements involving defined benefit plans, where companies agree to fixed-dollar compensation for impacted retirees rather than adjusting ongoing benefits.

For other sponsors, the Citgo outcome suggests the value of proactively evaluating their own actuarial practices to ensure they don’t face similar disputes. Such evaluations are not just financial safeguards; they also support a company’s reputation, signaling commitment to fair and accurate benefits.

The financial risk for sponsors failing to update actuarial assumptions can be substantial, given that even minor inaccuracies can lead to lawsuits and, consequently, high settlement costs.

Defined benefit plan sponsors are increasingly taking steps to align actuarial assumptions with contemporary data on mortality, longevity, and interest rates to preemptively manage their exposure to legal and financial risks.

Retirement planning and litigation exposure

The Citgo settlement emphasizes the growing need for plan sponsors to keep actuarial assumptions current. Outdated metrics can leave companies vulnerable to litigation, as retirees seek fair benefits based on today’s life expectancy and economic conditions.

Defined benefit plans, once a staple in retirement planning, are becoming less common as employers shift to defined contribution plans, such as 401(k)s, which transfer investment risk to employees. However, sponsors who maintain defined benefit plans are under increasing scrutiny to ensure actuarial assumptions are not only accurate but defensible.

For plan sponsors, it is advisable to conduct regular actuarial reviews, incorporating the latest mortality tables and interest rates. Ensuring assumptions remain reasonable is essential for compliance and plays a crucial role in sustaining the financial health of these plans.

Many experts recommend that sponsors work with professionals who specialize in ERISA compliance and actuarial science to establish a sound foundation for decision-making.

Transparency in Retirement Planning

This proactive approach minimizes the likelihood of disputes by ensuring calculations accurately reflect the longevity and investment risks associated with modern retirement demographics.

Moreover, consistent record-keeping of actuarial calculations is crucial. Detailed records offer a defense should legal challenges arise and help demonstrate transparency in managing employee benefits.

The Citgo case underscores the importance of transparent, data-driven management of retirement benefits, which can build trust among plan participants. By regularly updating actuarial assumptions and maintaining thorough documentation, companies can not only improve benefit accuracy but also reassure retirees that their financial futures are calculated with precision.

The Citgo settlement represents a turning point in retirement planning, illustrating the importance of transparency and accountability. As other cases related to actuarial equivalence proceed, companies will need to evaluate their own actuarial practices in light of these evolving legal standards.

This case encourages plan sponsors to collaborate with experts who understand ERISA’s intricacies and can help mitigate litigation exposure by ensuring benefits accurately reflect current demographic and economic conditions.

Citgo stresses actuarial assumptions

The Citgo settlement underscores a critical lesson for plan sponsors: the importance of reasonable actuarial assumptions in retirement planning cannot be overstated.

Failing to periodically review these assumptions with an eye toward accuracy and regulatory compliance can have significant legal and financial consequences. For defined benefit plan sponsors, the settlement reinforces the value of transparency and rigorous adherence to modern actuarial standards to support long-term sustainability and equitable retirement payouts.

In conclusion, Citgo’s settlement highlights the financial and operational risks of outdated actuarial assumptions in defined benefit plans. Companies that proactively review and update their actuarial data stand to not only reduce litigation risk but also strengthen participant trust. By ensuring accurate and fair benefit calculations, plan sponsors can support sustainable retirement offerings that meet participants’ expectations and regulatory standards.