Free Proposed Findings of Fact and Conclusions of Law - District Court of Connecticut - Connecticut

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UNITED STATES DISTRICT COURT DISTRICT OF CONNECTICUT -----------------------------------------------------X : JANICE C. AMARA, GISELA : R. BRODERICK, ANNETTE S. GLANZ : individually, and on behalf of others : similarly situated, : : Plaintiffs, : v. : : CIGNA CORP. AND CIGNA : PENSION PLAN, : : Defendants. : : -----------------------------------------------------X

3:01 CV 2361 (MRK) Trial Date: 09/11/06

DEFENDANTS' PROPOSED FINDINGS OF FACT

Dated: June 27, 2006

MORGAN, LEWIS & BOCKIUS LLP By: /s/ Joseph J. Costello Joseph J. Costello Jeremy P. Blumenfeld Jamie M. Kohen Admitted pro hac vice 1701 Market Street Philadelphia, Pennsylvania 19103-2921 (215) 963-5295/5258/5472 (215) 963-5001 (fax) ROBINSON & COLE James A. Wade (CT # 00086) 280 Trumbull Street Hartford, Connecticut 06103 (860) 275-8270 (860) 275-8299 (fax) Attorneys for Defendants CIGNA Corporation and CIGNA Pension Plan

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TABLE OF CONTENTS Page I. BACKGROUND ON CASH BALANCE PLANS AND TRADITIONAL PLANS........ 1 A. B. II. A. Traditional Defined Benefit Plans ......................................................................... 1 Cash Balance Plans ................................................................................................ 2 CIGNA's Part A Traditional Pension Plan And The Creation Of The Part B Cash Balance Plan.............................................................................................. 6 1. 2. All Plan Participants Earned Benefits Under Part A Through December 31, 1997. ................................................................................... 6 On November 4, 1997, CIGNA Amended The Plan To Freeze Accruals In Part A For Certain Plan Participants As Of December 31, 1997...................................................................................................... 8 On December 21, 1998, The Amendment Creating Part B Was Signed, Retroactive To January 1, 1998. .................................................. 9 Benefit And Interest Credits .................................................................... 11 Opening Account Balances, Protected Minimum Benefits, And Retirement................................................................................................ 13 Plan Administration ................................................................................. 17

THE CIGNA PENSION PLAN......................................................................................... 6

3. B.

The Terms Of Part B............................................................................................ 11 1. 2. 3.

III.

B TREATS OLDER EMPLOYEES AT LEAST AS WELL AS IT TREATS YOUNGER EMPLOYEES (COUNT 3) ......................................................................... 22 A. Defendants' Expert's Analysis Of Age Discrimination Is Grounded In Sound Actuarial Science. ..................................................................................... 22 1. 2. B. Mr. Sher's Credentials ............................................................................. 22 Mr. Sher's Methodology And Conclusions ............................................. 23

Plaintiffs' Expert's Analysis Of Age Discrimination Is Fatally Flawed ............. 28

IV. V.

PART B DID NOT RESULT IN FORFEITURES, BACKLOADING OR CUTBACKS (COUNTS 1 AND 5)................................................................................. 40 PLAINTIFFS AND THE TESTIFYING CLASS MEMBERS HAVE BEEN PROVIDED ABUNDANT INFORMATION REGARDING THEIR RETIREMENT BENEFITS AND HAVE SUFFERED NO LIKELY, OR ACTUAL HARM RESULTING FROM ANY OMISSIONS FROM THE SPD OR SECTION 204(H) NOTICE (COUNTS 2 AND 4)................................................... 47

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TABLE OF CONTENTS (continued) Page A. The Plan Administrator Provided Participants A Number Of Communications Regarding The Freezing Of Accruals Under The Old Plan, The Creation Of Part B, And The Precise Amounts In Participants' Part B Accounts. .................................................................................................. 47 1. A Memorandum Was Sent To Managers, A Letter Was Sent To Grandfathered Participants Notifying Them Of Their Status, And A Memorandum Was Sent To Human Resources Representatives And Key Benefits Contacts...................................................................... 47 The Signature Benefits Newsletter Sent To Employees In Early November Provided Notice That Part A Accruals Would Be Frozen As Of December 31, 1997, And Explained The Cash Balance Plan............................................................................................. 48 In December 1997, All Participants Received A Signature Benefits Retirement Kit, Which Reinforced To Participants That CIGNA Would Freeze Accruals Under Part A For All Non-Grandfathered Participants As Of December 31, 1997, And Further Explained The Cash Balance Plan. ........................................................................... 52 In June 1998, Part B Participants Received A Statement Advising Them Of Their Opening Account Balance, And CIGNA Published Part B SPDs In October 1998 And September 1999, Which Accurately Describe Part B's Benefit Structure. ..................................... 60 The Plan Administrator Provided Participants Precise Information Regarding Their Part B Pension Accounts Through Annual Account Statements, Total Compensation Reports, A Retirement Planner, A Benefits Hotline, And Websites............................................. 64

2.

3.

4.

5.

B.

None Of The Plaintiffs Or Testifying Class Members Suffered Likely Or Actual Harm Resulting From Any Omission In The SPD Or Section 204(h) Notice. ...................................................................................................... 68

VI.

PLAINTIFFS AND THOUSANDS OF CLASS MEMBERS SIGNED RELEASES WHICH BAR THEIR CLAIMS (ALL COUNTS)..................................... 78

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In addition to Defendants' Objections and Responses to Plaintiffs' Proposed Findings of Fact in which Defendants stipulated to many of Plaintiffs' proposed findings, Defendants CIGNA Corporation ("CIGNA") and CIGNA Pension Plan (collectively, "Defendants") hereby propose the additional findings of fact set forth below. I. BACKGROUND ON CASH BALANCE PLANS AND TRADITIONAL PLANS A. 1. Traditional Defined Benefit Plans The formula for earning benefits in a traditional defined benefit pension plan

typically is an annual benefit payable for the life of the employee ("annuity"), where the annual benefit is a percentage of the employee's "salary" multiplied by the employee's years of service. Salary may be defined as final salary, the average of salary in the last five years, or some other similar definition. For example, an employee might accrue a pension benefit commencing at age 65 of 1.5% of salary for every year of service. After 30 years of service he would have an annual pension benefit of 45% of salary. Testimony of Lawrence Sher (hereinafter "Sher Testimony"). 2. The annuity has an actuarially equivalent present value based on interest rates and

the participant's age and life expectancy. In other words, using certain actuarial assumptions, the value of the annuity can be expressed as a lump sum value today. Sher Testimony. 3. By design, participants under traditional pension plans earn most of their benefits

in their last years of service. Traditional plans provide most of their benefits only after an employee stays with the same employer for many years. Sher Testimony. 4. Traditional plans also frequently provide subsidized early retirement benefits that

encourage employees to stay with the employer until such benefits become available and then to leave. An unsubsidized early retirement benefit is a benefit payable before normal retirement age (typically age 65) that has the same value (discounting to present value and with actuarial adjustments) as the age-65 benefit. A subsidized early retirement benefit is a benefit payable -1-

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before normal retirement age that has an overall value greater than the value of the normal retirement benefit. If the employee does not retire early, the value of the subsidized benefit is worn away and lost. Sher Testimony. B. 5. Cash Balance Plans "Cash balance" retirement plans were designed to reflect changes in the

workforce of employees and to allow employees to earn their retirement benefits more evenly over their careers. Sher Testimony. 6. Since the mid-1980s, hundreds of U.S. employers have adopted "cash balance"

retirement plans. Most of these plans resulted from the "conversion" of their traditional defined benefit plans to cash balance plans. Sher Testimony. 7. Recent estimates indicate that between one-quarter and one-third of large U.S.

employers sponsor a cash balance plan. According to the Pension Benefit Guaranty Corporation, over 1,500 cash balance plans and other similar "hybrid" plans were in existence as of 2003, providing pension benefits to over 8 million participants, one quarter of the total population covered by defined benefit plans. Defs' Ex. 531, Pension Benefit Guaranty Corp., Pension Insurance Data Book 2004, at 59 (2005), at http://www.pbgc.gov/docs/2004databook.pdf (last visited June 22, 2006); Sher Testimony. 8. Usually, the amount of the cash balance benefit earned in any period is equal to a

percentage of the participant's pay during that period and, therefore, is often referred to as a "pay credit." Pay credits are defined in a number of ways. For example, they may be a fixed percentage of pay (e.g., 5%), they may be integrated with Social Security (e.g., 3% of pay up to the Social Security wage base and 5% over the wage base), or they may vary by the employee's age or service (e.g., 4% of pay each year up to age 40 and 5% each year thereafter). The pay credits are periodically credited to a participant's account (e.g., each pay period). Sher -2-

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Testimony. 9. In order to reflect economic changes associated with the passage of time, i.e., the

time value of money, cash balance plans also provide for "interest credits," determined by applying a plan-specified interest rate to the participant's account balance. In most cases, the interest credit rate is a "floating" rate that changes annually (or more frequently) and is tied to a market rate such as the yield on a selected U.S. Treasury security. Sometimes, a floating interest credit rate is subject to a minimum fixed rate (e.g., 4%), to a maximum fixed rate (e.g., 8%), or both. Sher Testimony. 10. Thus, for example, if a cash balance plan provides pay credits of 5% salary, and

one assumes that interest rates are approximately the same as increases in wages (e.g., 4%), then in year 1, an employee with a salary of $60,000 would earn a pay credit of 5% x $60,000 = $3,000. The next year, the employee would earn interest on his first year's pay credit of 4% x 3,000 = $120. As of year 2, therefore, his first year's pay credit has a value of $3,120 (first year's pay credit plus interest). That employee also would earn a pay credit on his year 2 salary, which salary is 4% higher than his year 1 salary, 1.04 x $60,000 = $62,400. The pay credit on the $62,400 year 2 salary is 5% x $62,400 = $3,120. In this example, the first year's benefit and second year's benefit have the same value ($3,120) as of year 2. In year 3, both of these benefits will continue to earn interest at the same rate and will continue to have the same value. This process can be followed through each additional year that the employee works and earns pay credits. Sher Testimony. 11. Because of its different plan design, the benefit formula under a cash balance plan

is expressed in a different way than under a traditional defined benefit plan. In a traditional plan, the benefit formula is typically expressed as a life annuity beginning at the normal retirement age

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defined by the plan (often age 65). Conversely, the benefit in a cash balance plan is expressed as a current lump sum value that is equal to the employee's "cash balance account." Sher Testimony. 12. One of the main attributes of cash balance plans that has spurred this trend is that

their benefit values, as in 401(k) plans, are much easier to understand than those under a traditional defined benefit plan, because the benefit value is expressed in terms of an account. Sher Testimony. 13. Another important attribute of cash balance plans is that meaningful benefit

values accrue more quickly and evenly over an employee's career as compared to traditional defined benefit plans. Sher Testimony. 14. Since most employees do not stay with the same employer for most of their

careers, employees will often receive more generous benefits under cash balance plans than under traditional defined benefit plans with similar costs. Cash balance plans are not inherently more or less costly than traditional defined benefit plans. Sher Testimony. 15. Many cash balance plans are the result of "conversions" from traditional defined

benefit plans that are accomplished through plan amendments. There are two major approaches used in practice: the "sum-of" approach and the "opening balance" approach. Sher Testimony. 16. Under the "sum-of" approach, benefit accruals as of the conversion date under the

prior traditional benefit formula are frozen. At the same time, participants begin to receive pay credits (and interest credits) going forward. The prior plan accrued benefits typically would continue to be paid under the forms previously allowed (which often do not include a lump sum option), and the cash balance portion usually is payable in a lump sum equal to the participant's account balance, or as an annuity. Essentially, the participant in these cases has two separate

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pension benefits, with different rules, formulas, and procedures governing each form. Sher Testimony. 17. Under the "opening balance" approach, participants are granted initial cash

balance accounts as of the conversion date to reflect their years of service under the prior benefit formula. Often, opening balances are determined based on the lump sum value of the accrued normal retirement benefits (typically the age-65 benefit) under the prior formula as of the conversion date, by discounting the benefit to present value using certain interest rates and actuarial factors prevalent at the time. Sher Testimony. 18. Sometimes, opening balances are increased to an extent to reflect subsidies

inherent in early retirement benefits under the prior formula. Many employers have been reluctant, however, to build early retirement subsidies into opening balances because that could result in a much more favorable treatment as compared to the prior benefit formula. That is because in a traditional plan, the value of early retirement subsidies dissipates, i.e., wears away and is lost, as the employee continues to work. Once the subsidized value of the early retirement benefit is factored into the opening balance, however, it does not wear away. Sher Testimony. 19. There is no provision of law that sets forth minimum requirements for

determining opening balances. In fact, the United States General Accounting Office has specifically stated that "current federal law does not govern how plan sponsors set opening hypothetical account balances for cash balance plans, provided that a plan ensures that participants do not receive less than the present value of prior accrued benefits if they separate from the employer." Defs' Ex. 533, United States General Accounting Office, Report to Congressional Requesters, Private Pensions, Implications of Conversions to Cash Balance Plans, September, 2000 at 30 (P02283); Sher Testimony.

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20.

However, in order to assure that participants always receive at least as much as

they were entitled to under the prior formula, cash balance plan conversions with opening balances generally provide that in no event will the employee's total benefit (or the value of such benefit) be less than the benefit accrued on the conversion date (or the value of such benefit) under the pre-conversion benefit formula. Sher Testimony. 21. The opening balance approach has been the more popular approach primarily

because employers perceived that employees would prefer to have all of the plan benefits expressed under the new paradigm ­ that is, in terms of a current lump sum value. From the employee's perspective, neither approach is inherently superior. It depends on the design details and on future events that are unknown at the time of the conversion (e.g., changes in interest rates, pay increase rates, etc.). Sher Testimony. II. THE CIGNA PENSION PLAN A. CIGNA's Part A Traditional Pension Plan And The Creation Of The Part B Cash Balance Plan 1. 22. All Plan Participants Earned Benefits Under Part A Through December 31, 1997.

Prior to January 1, 1998, CIGNA had a traditional pension plan for its employees.

Stip. Ex. 2, Prior CIGNA Pension Plan in effect before January 1, 1998 ("Part A"). When CIGNA created a cash balance plan for certain participants in the CIGNA Pension Plan (sometimes referred to as the "Plan"), known as "Part B," the original traditional defined benefit plan formula that continued for certain grandfathered participants was labeled "Part A." Stip. Ex. 2, Part A. For ease of reference, CIGNA's traditional defined benefit will be hereafter referred to as "Part A." 23. Depending on an employee's employment history, the employee would either be

entitled to benefits under the Tier 1 or Tier 2 formula under the Plan. The "Tier 1" formula

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provides an age-65 annuity benefit equal to 2% of final three-year average pay for each year of service up to 30 years, less a "social security offset." The participant can retire early at age 55 with 10 or more years of service and receive an immediate annuity benefit equal to the accrued age 65 benefit (not reflecting the social security offset), reduced for early commencement by factors in the Plan (e.g., to 79% of the unreduced benefit for most participants). Upon reaching age 65, the benefit is reduced by the participant's social security offset. Stip. Ex. 2, Part A at 4.2, 4.3 (D00040-46). 24. The Tier 2 formula provides an age-65 annuity benefit equal to 1-2/3% of final

five year average pay for each year of service up to 35 years, less the social security offset. A Tier 2 participant could retire early after age 55 with 15 more years of service and receive an immediate annuity benefit equal to the accrued age-65 benefit (not reflecting the social security offset), reduced by 5% per year if benefits begin before age 65 (e.g., 50% for commencement at age 55). Upon reaching age 62, the benefit payable is reduced by the social security offset (adjusted to age 62). Stip. Ex. 2, Part A at 4.3(b) (D00046). 25. The early retirement benefits, i.e. pre-age 65 benefits, available under Tier 1 and

Tier 2 were subsidized benefits. Stip. Ex. 2, Part A at 4.3 (D00043). 26. The Plan also included a provision that benefited certain married participants ­

the so-called "preserved spouse's benefit" ­ whereby a portion of the participant's pension (generally 30%) would be payable after his or her death for the remaining lifetime of the surviving spouse. When this kind of protection is provided to retired participants, many pension plans reduce the participant's lifetime pension in order to compensate for the added value of the survivor payments. However, participants eligible for this coverage received it free of charge. A participant eligible for this coverage who elects to have a larger portion (e.g., greater than 30%)

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of the pension to continue to his or her spouse after the participant's death, would get credit for the free preserved spouse's benefit ­ i.e., only the difference between the amount elected and the amount of preserved spouse's benefit would serve to reduce the participant's lifetime pension. For example, a participant who elects a 50% spouse's benefit would only have his or her lifetime pension reduced to pay for the cost of providing the additional 20% spouse's benefit. Stip. Ex. 2, Part A at Section 6.4 (D00063). 27. The Tier 1 and Tier 2 formulas did not have a lump sum option. That is,

participants could elect their benefits in one of several different annuity options, but could not elect to receive their benefits as a lump sum. Stip. Ex. 2, Part A at Article VI (D00260 - 71). 28. Under Part A, once employees were separated from employment with CIGNA,

their prior plan benefit was static and did not continue to accrue, because it was based on earnings with CIGNA. Stip. Ex. 2, Part A at 4.2 (D00040 - 43). 2. On November 4, 1997, CIGNA Amended The Plan To Freeze Accruals In Part A For Certain Plan Participants As Of December 31, 1997.

29.

In November 1997, CIGNA's Chief Executive Officer ("CEO"), Wilson Taylor,

signed an amendment to the CIGNA Pension Plan freezing benefit accruals for all Tier 2 participants (also known as "new formula participants") and all participants with a combined age and years of credited service less than 45. Depenbrock v. CIGNA Corp., 278 F. Supp. 2d 461, 469 (E.D. Pa. 2003), reversed on other grounds, 389 F.3d 78 (3d Cir. 2004) ("Taylor's execution of Amendment Number 4 . . . froze the pension benefit accruals of the participants that would be converted to cash balance plan effective December 31, 1997"). 30. The amendment provided in part: Notwithstanding any other provision of the Plan, no Employee who, as of December 31, 1997, is a New Formula Participant or has a combined total Years of Credited Service and age less than -8-

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forty-five (45) shall accrue any additional benefits under the Plan after December 31, 1997. The foregoing cessation and/or suspension in benefit accruals and exclusion from eligibility to participate in the Plan after December 31, 1997, shall remain in effect until the adoption of a subsequent amendment to the Plan, and such subsequent amendment may provide for benefit accruals under terms and conditions different from the Plan provision in effect before 1998. No such subsequent amendment shall result in the accrued benefits of any Participant being less than such Participant's accrued benefit under the plan as of December 31, 1997. Stip. Ex. 2, Amendment No. 4 (D00132 - 133). 31. Thus, according to the express words of Amendment No. 4, until a "subsequent

amendment" was adopted, the affected participants had their benefits frozen (i.e, reduced their accruals to zero), and they would accrue no new pension benefits after December 31, 1997. Stip. Ex. 2, Amendment No. 4 (D00132). 32. The only Plan amendment causing a reduction in benefits, and which therefore

required a Section 204(h) notice, was this freezing of benefit accruals under Part A for certain participants, effective December 31, 1997. Stip. Ex. 2, Amendment No. 4 (D00132). 33. Those older, longer service employees whose age plus service totaled at least 45

and who were not "new formula participants" were grandfathered, and continued to accrue benefits under Part A. Stip. Ex. 2, Amendment No. 4 (D00132). 3. 34. On December 21, 1998, The Amendment Creating Part B Was Signed, Retroactive To January 1, 1998.

On December 21, 1998, the CEO signed the Plan document for the cash balance

plan, Part B, as well as an updated traditional Plan document, Stip. Ex. 2, Part A at D10336 443); Stip. Ex. 1, Part B at D10444 - 10530; Depenbrock, 389 F.3d 78 (holding that "December 21, 1998, is the effective date of the amendment" implementing the cash balance plan). 35. Although the Plan document was not signed until December 1998, it was

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retroactive to January 1, 1998. Depenbrock, 389 F.3d at 83. Thus, Part B participants received pension and interest credits in 1998 for the entire year, not just ten days. See, e.g., Defs' 519, Pension Plan Statement for the Period Ending June 30, 1998 (reflecting benefit and interest credits earned from January 1, 1998 to June 30, 1998). 36. The adoption of Part B resulted in an increase in benefit accruals for non-

grandfathered participants who moved to the cash balance plan because the previously adopted Amendment No. 4 had frozen all of their benefit accruals. That is, non-grandfathered participants went from having no benefit accruals (under Amendment No. 4) to accruing benefits under Part B. 37. The non-grandfathered participants who were employed as of December 31, 1997

became participants in Part B, and their Part A accrued benefits were converted to an opening account balance in Part B at that time. Stip. Ex. 1, Part B at Section 1.28 (D00278-79). 38. Additionally, any employees hired for the first time after January 1, 1998

automatically became participants in Part B upon their hire. Stip. Ex. 1, Part B at Section 2.1 (D00285). These individuals are not part of the class in this case, which only includes Part B participants who previously were participants in Part A. 39. Plan participants who were no longer employed by CIGNA on December 31,

1997, did not become participants in Part B on January 1, 1998. So long as they did not return to work for CIGNA, as further described below, they remained forever as participants in Part A. Accordingly, these individuals are not part of the class in this case because they never were participants in Part B. Stip. Ex. 1, Part B at 2.4(a) (D00285). 40. Part B provides that grandfathered participants in Part A who left CIGNA and

then were rehired by CIGNA after the adoption of the Part B would become participants in Part

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B upon their rehire. Stip. Ex. 1, Part B at Section 2.4 (00285). 41. These "rehires" are people who were grandfathered under Part A, left CIGNA to

take a job with another company, and then returned to CIGNA months or years later. Testimony of John Arko (hereinafter "Arko Testimony"), identified as Stip. Ex. 194. 42. Originally, the Plan Administrator placed rehires who rejoined CIGNA between

January 1, 1998 and December 21, 1998 (when Part B was signed) into Part B. Depenbrock, 389 F.3d at 80. However, in a lawsuit filed by a rehire, John Depenbrock, the United States Court of Appeals for the Third Circuit determined that those rehires should have remained in Part A because the amendment creating Part B and establishing its rule applicable to rehires was not valid until signed by the CEO on December 21, 1998. Depenbrock, 389 F.3d at 82-83. 43. As a result of the Depenbrock decision, the Plan Administrator decided to notify

other grandfathered Part A participants who were rehired between January 1, 1998 and December 21, 1998 that their benefits would be recalculated under Part A. Defs' Ex. 539, Letters from Plan Administrator Regarding Depenbrock dated February 4, 2005. There are approximately 194 employees who fall into this group. Stip. Ex. 176, Depenbrock Letters at SuppD0484. B. The Terms Of Part B 1. 44. Benefit And Interest Credits

Under Part B, participants earn pay credits (referred to as "benefit credits") based

on a percentage of their "Eligible Earnings" each year, plus interest on their account balance. Stip. Ex. 1, Part B at Article VI (D00291 - 93). 45. The pay credit rate is age-# and service-favored ­ i.e., Part B provides a higher

credit rate to older or longer service employees than similarly situated younger or shorter service

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employees.1 The following table shows the Plan's benefit credit rates: Table A: Benefit Credit Rates Under Part B of CIGNA Pension Plan Age Plus Service Under 35 35 ­ 44 45 ­ 54 55 ­ 64 65 or over Arko Testimony. 46. For example, an employee who is age 40 with 10 years of service in 2003 (i.e, age Rate Applied to Pay Up to Integration Level 3% 4% 5% 6% 7% Rate Applied to Pay Over Integration Level 4.5% 5.5% 6.5% 7.5% 8.5%

plus service is 50) and earns $60,000 receives a benefit credit in 2003 of $3,247.50 (5% of $43,500 plus 6.5% of $16,500). Had the same employee been age 60 rather than 40, the pay credit would be $1,200 higher, or $4,447.50 (7% of $43,500 plus 8.5% of $16,500). For any two participants who have the same service and pay history, the older one will receive a benefit credit in a given year that is either the same or higher than the younger employee. Similarly, as an employee continues in service, his or her benefit credit rates will either remain the same or increase from one year to the next. Arko Testimony; Sher Testimony. 47. Participants also receive interest credits quarterly on their account balances at a

floating rate that is subject to change at the beginning of each calendar year. The annualized Plan rate is the rate on five-year U.S. Treasury securities (constant maturity) in the preceding November plus 0.25% (subject to a minimum of 4.5% and a maximum of 9.0%). Stip. Ex. 1, Part B at Section 4.2(b) (D00293). Interest credits continue to be added to a participant's

1

The pay credit rate also is integrated with Social Security to some extent ­ i.e., provides a higher credit rate on pay over the "Social Security integration level." Part B provides that the integration level is one-half of the Social Security taxable wage limit in each year (e.g., $34,200 in 1998 and $43,500 in 2003). Defs' Ex. 503, Amendment 1.2 to Part B (D00323).

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account until the account is paid out as a lump sum or until annuity payments start. Stip. Ex. 1, Part B at Section 4.2 (D00292 - 293). The interest rate is the same for all employees, regardless of age. The actual historical interest credit rates under Part B of the Plan are as follows: Table B: Interest Credit Rates Under Part B of CIGNA Pension Plan Year 1998 1999 2000 2001 2002 2003 2004 2005 2006 Arko Testimony. 48. Thus, in any given year, the older employee's benefit will equal or exceed the Plan Interest Credit Rates 6.05% 4.79% 6.22% 5.95% 4.50% 4.50% 4.50% 4.50% 4.50%

benefit payable to a similarly situated (i.e., same salary history and years of service) younger employee. 2. 49. Opening Account Balances, Protected Minimum Benefits, And Retirement

Former Part A participants who began coverage under Part B under the terms of

the Plan received opening balances based on the present value of their accrued benefits under the applicable Part A benefit formula as of December 31, 1997.2 Stip. Ex. 1, Part B at Section 1.28

2

New hires after December 31, 1997 were placed into Part B with an opening account balance of zero because they had no previously earned benefit. Employees rehired between December 21, 1998 and December 31, 2000 became participants in Part B and had their Part A benefits converted into an opening account balance.

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(D00278 - 279). 50. For purposes of calculating the present value of each participant's accrued benefit

under Part A, different present value factors (and the benefits to which they apply) were used depending upon individual circumstances. Stip. Ex. 1, Part B at Section 1.28 (D00278 - 79). 51. The most favorable treatment was provided to participants who were eligible for

Part B on January 1, 1998 and whose age plus service totaled 55 or more on such date. For such a participant, the opening balance was equal to the present value of the accrued Part A normal retirement benefit, adjusted by the Plan's early retirement reduction factors to an amount payable at age 62, using an interest rate equal to the five-year Treasury rate in effect in November 1997, minus 0.75% -- i.e., 5.05%. Mortality was assumed at all ages based on the 1983 (unisex) Group Annuity Mortality Table ("1983 GAM Table"). Stip. Ex. 1, Part B at 1.28 (D00278 - 79); Sher Testimony. 52. Thus, for these older employees, the benefit was converted into an opening

account balance using a lower (and hence more favorable) interest rate. Sher Testimony. 53. In other words, these participants received a portion (or all) of the early retirement

subsidies under the prior benefit formulas included in their account balances and present values were determined using a discount rate that was more than 1% below prevailing rates on 30-year Treasury bonds at the time. Using a lower discount rate produced higher opening balances since the value of future annuity payments is discounted to a lesser degree when using a lower discount rate. For example, a dollar payable a year from now is worth about 95 cents if discounted at 5% and about 94 cents if discounted at 6%. Arko Testimony; Sher Testimony. 54. For all other Part B participants, the opening balances were determined based on

Employees rehired after December 31, 2000 became entitled to two different benefits based on two different formulas: one based on the benefits earned under Part A before they left CIGNA and a separate benefit based on their service in Part B once they were rehired. Defs' Ex. 504, Amendment No. 2 to Part B.

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the accrued Part A normal retirement benefit (payable at age 65), using an interest rate equal to the five-year Treasury rate in effect in November 1997, plus 0.25% -- i.e., 6.05% (except using the 30-year Treasury bond rate in effect in the November preceding the year that the opening balance is established in the case of Part B participants who were not active participants on January 1, 1998). Again, mortality was assumed at all ages based on the 1983 GAM Table. The setting of these opening account balances was within the mainstream of practice in cash balance conversions. In fact, the most common approach is not to include any early retirement subsidies in opening balances. This is because an early retirement subsidized benefit is lost if not taken at early retirement. If the early retirement subsidized benefit is included in the opening account balance, the employee who retires at normal retirement age will have an increased account balance based on a subsidized benefit that he or she did not actually elect to receive. This defeats the purpose of the subsidized early retirement benefit (to permit employees to retire early if they so choose). Sher Testimony. 55. Under Part B, any participant (including any of the Plaintiffs) is absolutely

entitled at retirement to receive a benefit equivalent to his or her account balance, including all benefit and interest credits. Stip. Ex. 1, Part B at Section 7.1 (D00305 - 07); Stip. Ex. 1, Part B at Section 1.1 (D00270). 56. At retirement, or upon termination of employment, a participant is entitled to his

or her account balance if he or she elects to receive benefits in the form of a lump sum. Alternatively, a participant can elect to receive benefits in one of several other forms available, including a single life annuity (stream of monthly payments payable for life) or a joint and survivor annuity (stream of monthly payments for life, with additional payments payable to a spouse for the life of the spouse). Stip. Ex. 1, Part B at Section 7.2 (D00307 - 09).

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57.

If the amount of that account is less than a certain minimum benefit3 set forth in

Part B (the "Minimum Benefit"), the participant receives the equivalent of the account balance (including all benefit and interest credits) plus additional pension benefits sufficient to raise the participant's overall retirement benefit up to the minimum. Stip. Ex. 1, Part B at Sections 1.1(c) (D00270), 1.32 (D00280), 7.3(b) (D00309).4 In other words, a participant is entitled to the greater of a retirement benefit based on his account balance or the Minimum Benefit set forth in Part B. Stip. Ex. 1, Part B at Sections 1.1(c) (D00270), 1.32 (D00280), 7.3(b) (D00309). 58. Specifically, Section 1.1(c) of the Plan provides that: Minimum Benefit. In the case of a Participant who has a Part A Accrued Benefit which is converted into an Initial Retirement Account, such Participant's Accrued Benefit, expressed in the form of an immediate lump sum distribution, shall in no event be less than the present Equivalent Actuarial Value (determined using the Applicable Interest Rate and the Applicable Mortality Table) of the Participant's Minimum Benefit. Stip. Ex. 1, Part B at Section 1.1(c) (D10451). 59. The Minimum Benefit is defined as a participant's age-65 annuity benefit under

Part A, enhanced by the value of the "Preserved Spouse's Benefit," if applicable. Stip. Ex. 1, Part B at Section 1.32 (D00280). 60. Normal retirement age under the Plan is defined as age 65. Stip. Ex. 1, Part B at

Section 1.34 (D00281). 61. In addition, Section 7.3 of the Plan protects other benefits, in other benefit forms

3

The Minimum Benefit is based on the participant's ERISA-protected benefits under Part A, including early retirement benefits, plus certain non-protected benefits, such as Social Security supplements. Part B, Sections 1.32, 7.3(b). Specifically, section 7.3 of Part B provides in relevant part that: The payments under this Part B to a Participant described in paragraph 7.3(a) in the annuity form he has elected shall in no event be less than the Equivalent Actuarial Value of his Minimum Benefit . . . . Part B, Section 7.3(b).

4

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(e.g., early retirement subsidized benefits), to which an employee was entitled under the prior formula. Stip. Ex. 1, Part B at Section 1.34 (D00281); Stip. Ex. 1, Part B at Section 7.3(c) (D00309). 62. The most common reason that a participant's Minimum Benefit might exceed the

value of his or her account balance is if the participant was entitled to a subsidized early retirement benefit under the prior Plan, which would be preserved as part of the Minimum Benefit but was not included (for most employees) as part of the employee's opening account balance. A participant who retired before age 65 might have a Minimum Benefit that was subsidized which exceeded the value of the account balance, which was based on the age-65 (and hence unsubsidized) benefit. Because the initial account balance was calculated by converting each participant's annuity benefit into a lump sum using a particular interest rate, a subsequent decrease in interest rates could cause an employee's Minimum Benefit to exceed the value of the employee's account balance. Under these circumstances, the participant is entitled to his or her protected Minimum Benefit. Sher Testimony. Stip. Ex. 1, Part B at Sections 1.1(c) (D00270), 1.32 (D00280), 7.3 (D00309). 63. Because the prior Plan formula also had several subsidies that applied only to

particular benefit forms (e.g., joint and survivor annuity benefits), an employee also might have a protected Minimum Benefit that only applies if the employee elects that particular form of benefit. Stip. Ex. 1, Part B at Section 7.3 (D00309). 3. 64. Plan Administration

Both the Part A and Part B Plan documents provided that a Plan Administrator

would be designated by "The Committee," which was defined as "the CIGNA Corporation Corporate Benefit Plan Committee, or a successor entity or group of persons, that is the Named Fiduciary for the Plan as described in Article XII." Stip. Ex. 1, Part B at Section 1.17 (D00272); - 17 -

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Stip. Ex. 2, Part A at Section 1.18 (D00010); Stip. Ex. 1, Part B at Section 1.46 (D00282) (The Plan Administrator shall be "the person, entity, or committee responsible for the administration of the Plan as specified in Article XIII."); Stip. Ex. 2, Part A at Section 15.1 (D00098); Stip. Ex. 1, Part B at Section 13.1 (D00329) ("The Committee shall delegate to a Plan Administrator the duties, authority and functions set forth in this Article XIII."); Stip. Ex. 2, Part A at Section 15.1 (D00098). 65. Thus, the Plan document vested authority in the Benefits Committee to appoint a

Plan Administrator. Stip. Ex. 1, Part B at 13.1 (D00329); Stip. Ex. 2, Part A at 15.1 (D00098). 66. In accordance with these Plan provisions, the Committee formally designated

Stewart M. Beltz, Assistant Vice President Benefits, as the Plan Administrator for the traditional defined benefit plan on March 29, 1996. Defs' Ex. 507, Plan Administrator Appointments at SuppD1098. 67. The Committee designated Mr. Beltz's replacement as Plan Administrator, Gerald

T. Meyn, Vice President, on May 14, 2003. Defs' Ex. 507, Plan Administrator Appointments at SuppD1099. 68. Effective August 20, 2004, the Committee replaced Mr. Meyn with John Arko as

Plan Administrator. Defs' Ex. 507, Plan Administrator Appointments at SuppD1092. 69. The 1998 Part B summary plan description ("SPD") and 1999 Part B SPD

explicitly list the Plan Sponsor and the Plan Administrator for Part B: Plan Sponsor ... Plan Administrator CIGNA Corporation Stewart M. Beltz CIGNA Corporation 1601 Market Street Philadelphia, PA 19192

Defs' Ex. 505, 1998 Part B SPD at 17 (D00842); Defs' Ex. 506, 1999 Part B SPD at J-10 (D00652). - 18 -

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70.

CIGNA is the Plan Sponsor for the CIGNA Pension Plan. Stip. Ex. 1, Part B at

Section 14.1 (D00333). 71. CIGNA is not the Plan Administrator for the CIGNA Pension Plan. Stip. Ex. 1,

Part B at Section 13.1 (D00329 - D00330). 72. John Arko is the current Plan Administrator for the CIGNA Pension Plan. Stip.

Ex. 1, Part B at Section 13.1 (D00329 - D00330). 73. The Plan Administrator has the power to "interpret and construe the provisions of

the Plan" and to "determine all questions relating to a Participant's participation and benefits under the Plan." Stip. Ex. 1, Part B at Sections 13.2(a), 13.2(d) (D00329); Stip. Ex. 2, Part A at 15.2(a), 15.2(d) (D00098). 74. The Plan Administrator has the responsibility: "(e) To advise or assist

Participants regarding any rights, benefits or elections available under the Plan; (f) To provide the Participant an appropriate, written explanation in non-technical terms, within a reasonable period prior to the Benefit Commencement Date." Stip. Ex. 1, Part B at Section 13.2(e)-13.2(f) (D00329). 75. The Plan contains a detailed claims and appeals procedure for employees who

have questions or concerns about their benefits. Stip. Ex. 1, Part B at Article XIII. As detailed in the Plan, the Claims Procedure states: 13.5 Claims Procedure (a) Filing a Claim for Benefits. A Participant or Beneficiary shall notify the Plan Administrator or its delegate of a claim for benefits under the Plan. Such request may be in any form adequate to give reasonable notice to the Plan Administrator or its delegate and shall set forth the basis of such claim and shall authorize the Plan Administrator or its delegate to conduct such examinations as may be necessary to determine the validity of the claim and to take such steps as may be necessary to facilitate the payment of any benefits to which the Participant or Beneficiary may be entitled

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under the Plan. The Plan Administrator shall make all determinations as to the right of any person to a benefit under the Plan. (b) Denial of Claim. If the Plan Administrator denies in whole or in part any claim for benefits under the Plan by any Participant or Beneficiary, the Plan Administrator shall furnish the claimant with written notice of the decision not later than ninety (90) days after receipt of the claim, unless special circumstances require an extension of time for processing the claim. If such an extension of time for processing is required, written notice of the extension shall be furnished to the claimant before the end of the initial ninety- (90-) day period. In no event shall such extension exceed the period of ninety (90) days from the end of the initial period. The extension notice shall indicate the special circumstances requiring an extension of time and the date by which the Plan Administrator expects to render the final decision. The written notice of the denial of a claim shall set forth in a manner calculated to be understood by the claimant: (1) (2) (3) The specific reason or reasons for the denial; Specific reference to the pertinent Plan provisions on which the denial is based; A description of any additional material or information necessary for the claimant to perfect the claim and an explanation of why such material or information is necessary; and Appropriate information as to the steps to be taken if the claimant wishes to submit his claim for review.

(4)

(c)

Appeals Procedure. A claimant or his authorized representative may request a review of the denied claim by the Plan Administrator. Such request shall be made in writing and shall be presented to the Plan Administrator not more than sixty (60) days after receipt by the claimant of written notice of the denial of the claim. The claimant shall have the right to review the pertinent documents and to submit issues and comments in writing. The Plan Administrator shall make its decision on review not later than sixty (60) days after receipt of the claimant's request for review, unless special circumstances require an

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extension of time, in which case a decision shall be rendered as soon as possible, but not later than 120 days after receipt of the request for review. The decision on review shall be in writing and shall include the specific reasons for the decision, written in a manner calculated to be understood by the claimant, and specific references to pertinent Plan provisions on which the decision is based. The Plan claims procedure shall be administered in accordance with the applicable regulations of the Department of Labor. Stip. Ex. 1, Part B at Section 13.5 (D00330 - 331). 76. The Plan Administrator has considered numerous claims on a range of issues.

Even where a participant does not follow the claim procedure in the Plan, the Plan Administrator will consider a claim and decide the claim on its merits. The claim and appeal process is a fair and effective method for participants to have their claims heard and to have the terms of the Plan interpreted and applied. Arko Testimony. 77. The Plan also accounts for the fact that occasionally errors may occur by

specifically providing that the Plan Administrator will correct any mistakes: 13.6 Clerical Error If any fact pertaining to eligibility for an amount of benefits payable under the Plan to a Participant or other payee has been misstated, or in the event of clerical error, the benefits will be adjusted by the Plan Administrator or its delegate on the basis of the correct facts in a manner precluding individual selection. Stip. Ex. 1, Part B at Section 13.6 (D00331 - 332). 78. Prudential Retirement ("Prudential") is the record keeper for the CIGNA Pension

Plan, since the Stock Purchase and Asset Transfer of CRIS of CIGNA to Prudential in November 2003. 79. Since the sale, Prudential completes the benefits estimates and calculations for

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Plan participants, including the Class Members herein. When Prudential is missing information required to complete such estimates and calculations, Prudential contacts CIGNA, which provides the information. 80. Prudential has various controls, checks and systems in place to ensure that the

accuracy of all estimates and calculations for Plan participants is confirmed. III. B TREATS OLDER EMPLOYEES AT LEAST AS WELL AS IT TREATS YOUNGER EMPLOYEES (COUNT 3) A. 81. Defendants' Expert's Analysis Of Age Discrimination Is Grounded In Sound Actuarial Science. Defendants' expert, Lawrence Sher, has proposed a methodology for determining

the rate of an employee's benefit accruals with respect to cash balance benefits under Part B of the CIGNA Pension Plan. The Court finds that Mr. Sher's methodology and conclusions are sound and grounded in well-accepted principles of actuarial science. 1. 82. Mr. Sher's Credentials

Lawrence Sher is a Principal and the Director of Retirement Policy at Buck

Consultants, Inc., an actuarial and employee benefits consulting firm owned by Affiliated Computer Services. He is a Fellow of the Society of Actuaries and has practiced as an actuary since 1973. He practices primarily in the area of pension benefits. Sher Testimony. 83. Mr. Sher has extensive experience designing and consulting with respect to

defined benefit pension plans, including cash balance plans. In the past sixteen years, he has devoted a significant portion of his time to issues relating to cash balance plans, including providing technical assistance and advice to his firm's consultants and clients and to government officials, initiating and supervising research activities, speaking at professional conferences, publishing articles, and responding to questions from the media. Sher Testimony. 84. Pursuant to Fed. R. Evid. 702, the Court finds that Mr. Sher is qualified as an

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expert by his knowledge, skill, experience, training and education on the design of cash balance and traditional defined benefit plans generally, and the operation of Parts A and B of the CIGNA Pension Plan specifically. The Court further finds that Mr. Sher's testimony is based on sufficient facts and data drawn from the record, and is the product of reliable actuarial principles and methods, and that Mr. Sher has applied these principles and methods reliably to the facts of this case. 2. 85. Mr. Sher's Methodology And Conclusions

The Part B benefit credits for any older employee are at least as great as for any

younger employee with the same years of service and pay. Stip. Ex. 1, Part B, at Section 4.1 (D00291). 86. In addition, all Part B participants, regardless of age, receive interest credits at an

interest rate equal to the rate on five-year Treasury securities for the year plus 0.25% (subject to the 4.5% minimum and 9% maximum rates). Stip. Ex. 1, Part B, at Section 4.2 (D00292 - 293). 87. Section 204(b)(1)(H)(i) of ERISA uses the undefined phrase "the rate of an

employee's benefit accrual." This phrase is not a term of art that has a specific meaning in the actuarial profession. Actuaries calculate benefit accrual rates in a variety of contexts. Sometimes actuaries project benefits and then attribute those benefits to particular years of service or periods of time, in which case the actuary has calculated a benefit accrual "rate." In this general sense, actuaries commonly calculate benefit accrual rates. However, there is no universal method that actuaries invariably or ordinarily use for these purposes. Benefit accrual rates can be determined in a variety of ways, and the method that should be used in any given instance depends on the purpose of the calculation and the guidance, if any, given in the applicable rules and regulations. Sher Testimony. 88. In some instances, ERISA and the Internal Revenue Code spell out precisely how - 23 -

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benefit accrual rates should be determined. For example, ERISA and the Code provide significant details as to how benefit accrual rates must be determined in testing a defined benefit plan under the anti-backloading rules in ERISA sections 204(b)(1)(A), (B) and (C) and the parallel provisions of the Code. In this instance, IRS regulations provide even more details as to how to comply with those provisions. Under these circumstances, actuaries follow the requirements of the statute and regulations. Sher Testimony. 89. Other provisions in ERISA and the Code allow a choice among various methods

of calculating benefit accrual rates. For instance, section 1.401(a)(4)-3 of the nondiscrimination regulations introduces the term "accrual rate" and proceeds to define two types of rates, the "normal accrual rate" and the "most valuable accrual rate," and then provides three general approaches for calculating either of those rates. These regulations permit additional variations in how the rates can be calculated, for example, by allowing Social Security benefits to be "imputed" into the rates and by allowing the rates to be stated as dollar amounts or as a percentage of pay, where pay may be determined in alternative ways. Sher Testimony. 90. Still other provisions, such as ERISA section 204(b)(1)(H)(i), provide no

specificity at all about how the employee's benefit accrual rate is to be determined. In these instances, an actuary called upon to calculate a rate of benefit accrual should choose a method that is consistent with sound actuarial and economic principles and with the purpose for which the determination is being made. Of course, the actuary should reflect applicable regulations or other binding authority. Sher Testimony. 91. A preliminary question is whether it is even necessary to engage in actuarial

calculations of the rate of benefit accrual under the Part B cash balance formula. Section 204(b)(1)(H)(i) asks whether the "rate of an employee's benefit accrual" is frozen or reduced

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"because of the attainment of any age." If it is clear from the terms of a benefit formula that benefits continue to accrue in the same manner before and after the attainment of any given age or in a manner that becomes more favorable as age progresses, then there is no reason why mathematical calculations would be required. Sher Testimony. 92. Under the CIGNA Part B cash balance formula, as age progresses, benefit credit

rates continue to apply at the same or at a higher level. And, interest is credited to all participants at a rate indexed to five-year Treasury securities (subject to the minimum and maximum fixed rates). Neither interest credits nor pay credits are reduced or frozen because of the attainment of any age. Thus, actuarial calculations are not required in order to see that the cash balance formula does not reduce the rate of an employee's benefit accrual because of age. Sher Testimony. 93. To the extent that actuarial calculations are required, an appropriate means of

determining the rate of benefit accrual under the Part B cash balance formula is to measure the rate of growth in an employee's account balance. Table C-1 illustrates this approach for an employee hired at age 30 with a starting salary of $60,000 per year and 4.5% annual pay increases. The interest-crediting rate is also assumed to be 4.5% in all years. Sher Testimony. Table C-1: Rate of Increase in Account Balance5 (4.5% Annual Pay Increases; 4.5% Annual Interest Credit Rate)
Rate of Employee's Benefit Accrual Based on Incr. in Acct. Balance Not Time Value Adj. IRS Prop. Approach Including Interest Excluding Interest [1] Age 31 32
5

[2] Pay 60,000 62,700

[3] Benefit Credits 2,048 2,140

[4]

[5]

[6]

[7]

[8]

[9]

Service 1 2

Interest End of Yr. As Dollar As a % of As Dollar As a % of Credits Acct. Bal. Amount Pay Amount Pay ­ 92 2,048 4,280 2,048 2,232 3.41% 3.56% 2,048 2,140 3.41% 3.41%

For simplicity of illustration, Table C-1 adds interest credits at the end of the year.

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33 34 35 40 45 50 55 60 65

3 4 5 10 15 20 25 30 35

65,522 68,470 71,551 89,166 111,117 138,471 172,561 215,042 267,981

2,891 3,021 3,157 4,826 7,125 10,264 12,791 15,940 19,864

193 331 482 1,525 3,291 6,132 10,396 16,387 24,698

7,364 10,716 14,355 40,236 83,545 152,663 254,201 396,482 593,409

3,084 3,352 3,639 6,351 10,416 16,396 23,187 32,327 44,562

4.71% 4.90% 5.09% 7.12% 9.37% 11.84% 13.44% 15.03% 16.63%

2,891 3,021 3,157 4,826 7,125 10,264 12,791 15,940 19,864

4.41% 4.41% 4.41% 5.41% 6.41% 7.41% 7.41% 7.41% 7.41%

Sher Testimony. 94. The resulting rates are determined in dollar amounts (columns 6 and 8) and as a

percentage of pay (columns 7 and 9). Columns 6 and 7 take the total increase in account balance during each year. Looking at these results, it is not surprising that annual changes in account balances increase more and more quickly over time as interest credits begin to accumulate on growing account balances. If one considers the time value of money, however, the rates of increase would track the benefit credit amounts (Column 8) and the benefit credit rates (Column 9) because the time value of money would offset the interest credits paid under the formula. In fact, the IRS proposed regulations mentioned earlier do precisely that. Column 8 presents the time value adjusted rates determined in accordance with the IRS proposed regulations using dollar amounts and Column 9 does so as percentages of pay. Again, the rates either remain level or increase in each passing year. Sher Testimony. 95. The following Table C-2 repeats the calculations in Table C-1 except that, rather

than assuming 4.5% annual pay increases, no annual pay increases are assumed (i.e., the employee's pay is assumed to remain at $60,000 in all years).

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Table C-2: Rate of Increase in Account Balance6 (No Annual Pay Increases; 4.5% Annual Interest Credit Rate)
Rate of Employee's Benefit Accrual Based on Incr. in Acct. Balance Not Time Value Adj. IRS Prop. Approach Including Interest Excluding Interest [1] Age 31 32 33 34 35 40 45 50 55 60 65 Service 1 2 3 4 5 10 15 20 25 30 35 [2] Pay 60,000 60,000 60,000 60,000 60,000 60,000 60,000 60,000 60,000 60,000 60,000 [3] Benefit Credits 2,048 2,048 2,648 2,648 2,648 3,248 3,848 4,448 4,448 4,448 4,448 [4] Interest Credits ­ 92 188 316 449 1,267 2,434 4,036 6,124 8,727 11,971 [5] [6] [7] [8] [9]

End of Yr. As Dollar As a % of As Dollar As a % of Acct. Bal. Amount Pay Amount Pay 2,048 4,188 7,025 9,989 13,086 32,676 60,372 98,168 146,669 207,110 282,430 2,048 2,140 2,836 2,964 3,097 4,515 6,282 8,484 10,572 13,175 16,419 3.41% 3.57% 4.73% 4.95% 5.16% 7.53% 10.47% 14.14% 17.62% 21.96% 27.36% 2,048 2,048 2,648 2,648 2,648 3,248 3,848 4,448 4,448 4,448 4,448 3.41% 3.41% 4.41% 4.41% 4.41% 5.41% 6.41% 7.41% 7.41% 7.41% 7.41%

Sher Testimony. 96. Using the growth in an employee's account balance to measure an employee's

rate of benefit accrual (whether time value adjusted or not) is consistent with the fact that the basic promise in the cash balance formula is the employee's account balance. Part B generally provides (Section 1.1) that on any date of determination the "Accrued Benefit, expressed in the form of an immediate lump sum distribution" is equal to the participant's cash balance account. Stip. Ex. 1, Part B, at Section 1.19(a) (D00270). 97. Consistent with Section 1.1, every form of benefit that an employee may elect to

receive with respect to the cash balance benefit is derived from the employee's account balance.

6

For simplicity of illustration, Table C-2 adds interest credits at the end of the year.

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B. 98.

Plaintiffs' Expert's Analysis Of Age Discrimination Is Fatally Flawed. Plaintiffs' expert, Claude Poulin, has proposed a methodology for determining the

rate of an employee's benefit accrual with respect to cash balance benefits under Part B of the CIGNA Pension Plan. The Court finds that Mr. Poulin's methodology and conclusions are flawed and unreasonable as a matter of actuarial science. 99. The Poulin methodology measures rates of benefit accrual by considering the size

of the benefit that an employee would have if the employee (i) left the balance in his or her cash balance account to accumulate until age 65, and then (ii) converted the age 65 account balance into a life annuity. The second of these steps ­ conversion of the account balance into a life annuity ­ has no impact on the analysis. Sher Testimony. 100. On the other hand, the first step -- measuring the size of the benefit that the

employee would have if he left his account balance untouched until age 65 ­ is critical. By definition, a younger employee will have to wait longer than an older employee to turn age 65. The Poulin methodology, however, measures the rate of accrual of an employee's "age 65 benefit" without making any allowance for the fact that younger employees will have to wait longer than older employees before they will actually be able to receive the benefit being measured. Thus, when Mr. Poulin compares rates of benefit accrual of employees of different ages, he inherently compares employees who wait unequal lengths of time to receive their benefits. This approach ignores the time value of money and misstates the value of the benefit delivered by a plan over time. Sher Testimony. 101. An example will illustrate the point. Consider two employees who started work at

CIGNA at the beginning of 1998, when the cash balance conversion occurred, at ages 45 (Employee Y) and 50 (Employee O). Assume that both employees work at the same salary until the end of 2002 (assumed to be $30,000 in 1998 and growing 4.5% each year) and then leave for - 28 -

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other jobs. During the 5-year period, both employees receive the same pay credits (based on 5% of pay since all of their pays will be under the Social Security integration level), the same interest credits (based on the actual rates in effect those years) and the same account balance. Table D, which applies to both employees, shows the development of their pay credits, interest credits and account balances as of the end of each year.7 Sher Testimony.

Table D: Development of Cash Balance Accounts for Two Hypothetical Employees Pay Credits 1,500 1,568 1,638 1,712 1,789 --Interest Credits 0 72 195 296 314 5,023 3,473 Account at End of Yr. 1,500 3,140 4,973 6,981 9,084 14,107 17,580

Year 1998 1999 2000 2001 2002 2012 2017 Sher Testimony.

Pay 30,000 31,350 32,761 34,235 35,776 ---

Both employees have the same account balance of $9,084 at the end of 2002; Employee Y is then age 50 and Employee O is age 55. Assume that the account balances, if left untouched, will grow at a 4.5% interest-crediting rate as follows: Year 2002 (both depart) 2012 (Employee O turns 65) 2017 (Employee Y turns 65) Sher Testimony. 102. The Poulin methodology would compare the $14,100 "age 65 benefit" that the Account Balance (rounded) $ 9,100 $14,100 $17,600

7

For simplicity of illustration, Table D adds interest credits at the end of the year.

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older employee will have in 2012 with the $17,600 "age 65 benefit" that the younger employee will have in 2017. Because $17,600 is larger than $14,100, the Poulin methodology implies that the younger employee had a higher rate of benefit accrual than the older employee from 1998 through 2002.8 Sher Testimony. 103. This approach compares economic apples and oranges. The younger employee in

the example will receive a larger age 65 benefit than the older employee, but will have to wait five years longer to receive it. At any given point in time, the two employees will have the same account balances. Only by waiting longer to receive his or her benefits can the younger employee receive more interest credits than the older employee, and hence, a superficially larger benefit. Sher Testimony. 104. The Poulin methodology distorts the value of the benefits delivered by a benefit

formula unless it is adjusted to reflect the economic significance of waiting to receive payment of a benefit, i.e., unless it is corrected to reflect the time value of money. The time value of money is an economic principle which holds that the longer one must wait to receive a payment, the less the payment is worth. If the Poulin methodology were adjusted to reflect the time value of money, it would correctly indicate that the rate of benefit accrual under the CIGNA Part B cash balance formula stays constant or increases with age. Sher Testimony. 105. Actuaries routinely account for the time value of money by "discounting" a sum

payable in the future to its "present value" using an appropriate "discount rate." The interestcrediting rate paid by the CIGNA Part B cash balance formula is a