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

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UNITED STATES DISTRICT COURT FOR THE DISTRICT OF CONNECTICUT JANICE C. AMARA, GISELA R. BRODERICK, and ANNETTE S. GLANZ, individually and on behalf of all others similarly situated, Plaintiffs, vs. CIGNA CORP. and CIGNA PENSION PLAN, Defendants. Civil No. 3:01-CV-2361 (MRK)

PLAINTIFFS' PROPOSED FINDINGS OF FACT

Stephen R. Bruce Suite 210 805 15th St., NW Washington, DC 20005 (202) 371-8013 Thomas Moukawsher Ct08940 Moukawsher & Walsh, LLC 21 Oak St. Hartford, CT 06106 (860) 278-7000 Attorneys for Plaintiff Class

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Table of Contents I. Characteristics of Defined Benefit, Defined Contribution and Cash Balance Plans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 CIGNA's Cash Balance Conversion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 CIGNA's Cash Balance Conversion Produced Years with No Further Benefit Accruals. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 A. The Plan Years With No Additional Benefits Are Followed by Later Plan Years in Which the Rate of Accrual Is Over 33% Higher . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 B. CIGNA Concedes that There Are Periods in Which "Employees Accrue No Additional Benefits." . . . . . . . . . . . . . . . . . . . . . . . . . 20 C. The Cash Balance Accruals Were Conditioned on Participants Giving Up Statutory Rights to Previously-Earned Annuities; CIGNA Does Not Allow Employees to Receive Both Their Previously-Earned Accrued Benefits and the Future Cash Balance Accruals. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 D. CIGNA Admits that It Does Not Provide the "Minimum Benefit under Part B Plus [the Plaintiffs'] Benefit and Interest Credits on Top of That". . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 CIGNA's Cash Balance Formula Produces Rates of Benefit Accrual that Decrease With Age. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 A. CIGNA Recognized Internally that "Older" Employees Lose Benefits with Cash Balance and that the Rates of Accrual Decline with Age. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 B. CIGNA Was Advised of its "Vulnerability" to the Age Discrimination Claim. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 Cash Balance Conversions "Mask" Benefit Reductions Because Participants Cannot Compare the Cash Balance Accounts to Annuities Without Converting the Accounts to Annuity Form . . . . . . . . . . . . . . . . 37 A. CIGNA's Cash Balance Conversion Substantially Reduced Future Benefits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 B. CIGNA Recognized Internally that the Cash Balance Conversion Reduced Future Benefits.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
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II. III.

IV.

V.

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C.

D.

E.

F.

G.

CIGNA's SPD, SMM and Purported Section 204(h) Notice Do Not Disclose the Reductions in Future Benefits. . . . . . . . . . . . . . 49 1. Professor Stratman found no disclosures of reductions or other disadvantages in CIGNA's communications with its employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 2. CIGNA offered no expert report to rebut Professor Stratman's analysis.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61 CIGNA's 30(b)(6) Witness Agrees that the SPD, SMM and Purported Section 204(h) Notice Do Not Disclose Benefit Reductions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61 Although It Has Made Disclosures of Other Potential Reductions, CIGNA Did Not Disclose these Reductions And Contends That It Did Not Have to . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64 CIGNA's Inadequate Disclosures Affected the Ability of Its Employees to Make Well-Informed Employment and Retirement Decisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67 1. CIGNA repeatedly recognized that employees have to plan for retirement with the information that CIGNA provides.. 68 2. Employees requested additional information in managers meetings, focus groups and individual communications. . . 69 3. CIGNA had a policy of "NOT" providing benefit comparisons or information about "negative impacts" from the cash balance changes. . . . . . . . . . . . . . . . . . . . . . . 73 4. CIGNA's objective was to "quickly dispel any perceptions of take-aways" and avoid "significant negative reaction from employees" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78 5. The individual testimony offers additional circumstantial evidence that employees were "likely to have been harmed as a result" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83 The Amendment to CIGNA's "Rehire Rule" Was Not Disclosed in the Purported Section 204(h) Notice or a Summary of Material Modification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89

VI.

CIGNA Did Not Protect "Minimum Benefits" or Notify Participants of Those Benefits as the SPD Promised; Participants Were Also Not Notified When Optional Benefit Forms Had Greater "Relative Values" 95 A. CIGNA Did Not Notify Participants of Minimum Benefit Entitlements and Did Not "Populate" the Fields for Minimum
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B. C. D.

Benefits for Over 9,400 Members of the Class . . . . . . . . . . . . . . . 95 CIGNA Has Not Notified Participants When the Annuity Form of Benefit Has a Higher "Relative Value" . . . . . . . . . . . . . . . . . 101 CIGNA Also Failed to Protect the "Free 30%" Survivor's Benefits as the Plan Document and ERISA Require. . . . . . . . . . 105 CIGNA's Actuarial Expert Admits that the Plan Document Requires Minimum Benefits to Be Protected and that CIGNA's Benefit Notices Do Not Explain the "Relative Value" of Benefit Options. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 108

VII. CIGNA Has Still Not Conformed with the Third Circuit's Depenbrock v. CIGNA Decision, Which Requires It to Place the Members of the Amara Class Who Were Rehired Before December 21, 1998 Back Under the Part A Benefit Formula. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110

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I.

Characteristics of Defined Benefit, Defined Contribution and Cash Balance Plans. 1. Defined benefit plans typically offer to pay employees an annuity

based on a percentage of the employee's highest salary multiplied by years of service. Edward Zelinsky, The Cash Balance Controversy, 19 VA. TAX REV. 683, 687 (2000). As an employee draws closer to retirement age and enjoys a higher salary, the plan's benefits increase. Id. at 688. 2. Defined contribution plans do not offer fixed assurances about the

benefits that employees will receive at retirement. Employees bear the risk of what happens to the money after the funds are contributed. Id. at 691-2. But employees have an unconditional right to the money allocated to their separate individual accounts, plus the upside risk of favorable investment returns. 3. The employer's contributions to a defined contribution plan are

typically level (e.g., 10% of each year's salary). Zelinsky, supra, at 692. 4. Cash balance plans "mimic" defined contribution plans by referring

to individual accounts and allocations, but the accounts and allocations are "hypothetical" rather than actual: "the employee has no actual account, the employer makes no contributions to an employee account, and ... there is no account to which interest might be added." Berger v. Xerox, 338 F.3d 755, 758 (7th Cir. 2003).
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5.

In a cash balance conversion, a hypothetical opening account is

established. Many companies have established the opening account by calculating the present value of the participant's normal retirement benefit, without including any subsidized early retirement benefits to which the participant may be eligible. A variety of other methods have been used, including assigning a value to all of the employee's previously-earned benefits or setting the opening account at zero with the previous benefits treated as a dual benefit. Ex. 12 at P 2094; Ex. 13 at MER 01798; Ex. 14 at 20. 6. The employee's hypothetical account typically receives a benefit

credit (also called a pay credit) equal to a percentage of an employee's salary. Hypothetical interest credits are also assigned to the account at a specified rate, e.g., 4.5%, or a variable rate under a specified standard, e.g., the interest crediting rate tracks rates for short- or mid-term Treasury bills. Zelinsky, supra, at 693-4. The hypothetical interest credits are not related to the employer's return on investments, as required for defined contribution plans. 7. In what was dubbed the "first generation," cash balance formulas

offered all participants a flat percentage pay credit, such as 5%, along with interest credits, which resulted in "accrual patterns that strongly favored shortservice employees." Ex. 15 at 3.

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8.

The "second generation" of cash balance designs offered graded pay

credits, usually based on age or a combination of age and service. Ex. 16 (Benefits Canada, Aug. 1996, referring to this as a "life cycle" plan). According to a 2004 survey by Mellon, 74% of cash balance formulas have graded pay credits. Ex. 17 at 12; see also Ex. 18 (U.S. Bureau of Labor Statistics Compensation Survey for 2002-2003). 9. The employee's cash balance "account" is the cumulative total of

any opening account balance and the hypothetical pay and interest credits. The account may or may not be fully-funded. See, e.g., Burstein v. Allegheny Fdn. Ret. Account Plan, 334 F.3d 365 (3d Cir. 2003) (cash balance plan terminated without funds to pay the amounts credited to the accounts). 10. The hypothetical cash balance accounts do not "inherently" replicate

the traditional defined benefit promise of a definite year-by-year increment to a retirement annuity. In July 1996, the William Mercer consulting company ("Mercer"), which advised CIGNA about its cash balance conversion, prepared a discussion of legal issues for cash balance plans for its clients. Mercer's discussion recognized that ERISA's vesting, accrual and benefit option rules "all key off" the deferred annuity at normal retirement age. But Mercer observed that cash balance designs do not "inherently" offer a deferred annuity commencing at

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normal retirement age: "The plan design operates quite well merely defining the account balance and the method for determining an immediate annuity at any point in time." "Many employers continue to simply treat the plan like a lump-sum account plan without regard to making a deferred annuity calculation. It's not clear whether the IRS will approve this." Ex. 19 at EPTO 4166-67. 11. In a March 2006 "Issue Brief," the Employee Benefit Research

Institute ("EBRI") analyzed the 401k contributions that would have to be made to make up for lost benefit accruals if final-average pay plans or cash balance plans were frozen. EBRI found that the median contribution rate for a finalaverage pay plan is from 8 to 13.5% of pay, compared with about 3 to 4.6% of pay for a cash balance plan. Ex. 20 at 9. 12. In November 2005, the GAO issued a report finding that older

workers have borne the brunt of reductions in benefits from cash balance conversions. The report found that the median benefit decrease for an older worker was $238 per month compared with $59 per month for a younger worker (a difference of 300%). Private Pensions: Information on Cash Balance Pension Plans (GAO-06-42), available at http://www.gao.gov/new.items/d0642.pdf. 13. In a November 1999 Employment Law Seminar, the Morgan Lewis

& Bockius law firm which represents CIGNA recognized that plan sponsors

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have not "advertised" cash balance plans to participants as "lesser replacements": "Certainly one reason that cash balance plans are receiving so much negative attention is that plan sponsors have not advertised them to participants as lesser replacements for previously generous pensions. Yet, for some participants, the cash balance accrual formula inevitably generates smaller accruals in future years than would have accrued under their original plan." "Cash Balance Plans," written for Morgan Lewis & Bockius Labor and Employment Law Seminar, November 16, 1999, attached as Ex. 22 at 5-2. II. CIGNA's Cash Balance Conversion. 14. Before 1998, CIGNA plan participants enjoyed a traditional defined

benefit formula consisting of an annuity calculated at 1.67% or 2% of an average of highest pay times years of credited service. The two-tiered benefit structure (1.67% or 2%) depended on the employee's date of hire: Individuals hired after December 31, 1988 were called "New Formula Participants" and placed under the lower 1.67% formula. Ex. 2 at 11 and 34. 15. CIGNA's traditional defined benefit plan "provide[d] a fixed

monthly pension benefit for the employee's lifetime based on ... years of service with a participating CIGNA company and earnings closest to the date an employee leaves CIGNA.... So, since current wages generally reflect the retiree's current standard of living, retirement income levels can more closely reflect
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current economic needs." Ex. 23 (Signature Benefits Newsletter for EQUICOR Employees). 16. The Tier 1 (2%) formula offered "subsidized" early retirement

benefits under which benefits for employees eligible for early retirement were only reduced to 76 or 79% for retirement at age 55. The early retirement benefits included a valuable Social Security supplement payable between ages 55 and 65. Ex. 2 at 36-37. A "Free 30%" survivor's benefit, also called a Preserved Spouse's Benefit, was also provided. Id. at 56-57, 67-73. 17. CIGNA's Tier 2 (1.67%) formula offered early retirement benefits

with longer service requirements and larger reductions for early retirement, with a Social Security supplement payable between ages 55 and 62. Ex. 2 at 36-39. It did not offer a Free 30% survivor's benefit. 18. In 1998, CIGNA converted its traditional defined benefit pension

plan (sometimes called "Part A") to a cash balance pension plan (sometimes called "Part B"). See, e.g., Ex. 8 (Stratman Rpt. Ex. 2) at AMARA-00441. 19. Participants under the Tier 1 (2%) formula with 45 or more age and

service points were grand-fathered and therefore remained under CIGNA's traditional defined benefit formula. The other participants were moved to the cash balance formula. Ex. 1 at 6 and Ex. 24 at 6-8.

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20.

Section 1.55 of the Plan document specifically provides that the

cash balance account of a participant "is a bookkeeping account ...; it is not an actual account, and no Plan assets are allocated to it." Ex. 1 at 14. The Plan also provides that CIGNA does not guarantee "that the assets of this Plan will be sufficient to provide any or all of the benefits payable under this Plan." Id. at 74. 21. CIGNA's Annual Report for 2005 shows that its Pension Plan is less

than 75% funded. Ex. 25 at 65. 22. In August 1997, the Mercer company advised CIGNA that "There

are no legal requirements whatsoever in terms of how you determine an employee's opening account balance": "As you know, the typical method is to set it equal to the present value of the accrued benefit. However, in theory, a company could take other plausible approaches such as a retroactive application of the cash balance formula or a special contribution applied to past service or really anything else. It could even be zero if you wanted." Ex. 13 at MER 01798. 23. CIGNA decided to establish opening accounts, which it called

"initial retirement accounts," by calculating the participant's current annual benefits at normal retirement age, computing an actuarial value for that benefit based on a 6.05% interest rate and using the "GATT" mortality table. See Ex. 1 at 9-10; Ex. 26 at DO3925. A lower 5.05% interest rate was applied to the

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accrued benefit at age 62 for participants who were active employees on January 1, 1998 and whose age and service were 55 points or greater. Id. 24. The value of early retirement benefits and other favorable features

under the prior plan were not included in the opening balances. Ex. 3 (Poulin Rpt) ¶25. 25. The GATT mortality table was applied in a manner that took a

discount for "pre-retirement mortality," i.e., the likelihood that a participant would die between his or her current age and age 65. Ex. 3 (Poulin Rpt) ¶32 and Ex. 4 (Poulin Suppl Rpt) ¶15; see also Ex. 10 (Sher Rpt) at 8 (mortality was "assumed at all ages"); Ex. 27 (Answer to Int. No. 4 in the First Set of Interrogatories). 26. CIGNA's hypothetical pay credits followed a "second generation"

design by using a graded schedule based on age and service. Specifically, CIGNA's cash balance formula used the following schedule to calculate benefit credits (also called "pay credits"): POINTS Age + Service Under 35
1

BENEFIT CREDITS On Earnings Below Integration Level 3% On Earnings Above Integration Level1 4.5%

CIGNA defined the "Integration Level" as one-half of the Social Security taxable wage limit in each year. Ex. 1 at 10-11.
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35 to 44 45 to 54 55 to 64 65 or more Ex. 1 at 22. 27.

4% 5% 6% 7%

5.5% 6.5% 7.5% 8.5%

Interest credits would be added to the benefit credits by using the

yield on 5-year Treasury bills plus 25 basis points as an index, with a Floor Interest Rate of 4.5%. Ex. 1 at 24. 28. CIGNA expected to earn more on the plan's actual investments than

the interest crediting rates: "A cash balance approach allows us to ... reduce overall cost by earning more on our investments than we pay in the declared rate." Ex. 28 at D12287 (G.T. Meyn to D.M. Levinson, 1/6/1997). 29. Like the cash balance plans to which Mercer's July 1996 discussion

refers, CIGNA's cash balance formula offers to pay the accumulated benefit credits and interest credits, but it does not project a definite level of benefits at retirement. With one exception, Section 1.1 of CIGNA's Plan document defines the "accrued benefit" as the balance of a participant's Retirement Account on the date of determination. Ex. 1 at 1. The indefinite level of future benefits makes the plan's promise of future benefits comparable to that of a variable annuity. The risk of lower future interest rates is effectively placed on the participant. Ex.
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3 (Poulin Rpt) at ¶35. 30. When a participant separates from service before age 55, CIGNA

only offers the participant a lump sum distribution or an "immediate" annuity based on the participant's current age, even if the participant is young, e.g., age 30. Ex. 29 (Answer to Int. No. 4 is Second Set). CIGNA assumes that 100% of participants select the lump sum. ¶328 below. As a result, "the benefit is effectively a lump sum delivered at termination." Ex. 30. 31. By converting to the cash balance formula, CIGNA expected to

reduce both the ultimate benefits paid and its pension liability. Gerald Meyn, CIGNA's Vice President for Employee Benefits, observed in January 1997 that "A cash balance approach allows us to provide the competitive benefit level of a defined contribution plan but reduce overall cost by earning more on our investments than we pay in the declared rate." Ex. 28 at D12287. In June of that same year, David Durham, CIGNA's Assistant Vice President of Global Benefits, estimated "pension expense reductions of 12 to 15% over the next 20 years," even though most of the Tier 1 (2%) formula employees were being grandfathered under the prior plan. Ex. 77. In 2002, Mr. Meyn again observed "A conversion to a cash balance plan clearly reduces the ultimate benefits paid, and, of course, lowers the net pension liability." Ex. 31 at 29113 (Gerry Meyn to Jim

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Stewart). III. CIGNA's Cash Balance Conversion Produced Years with No Further Benefit Accruals. 32. In certifying the class, Judge Squatrito found that the Plaintiff

contends "that the conversion of the pension plan necessarily conditioned receipt of further benefits under the provisions of Part B upon [Ms. Amara's] acceptance of CIGNA's valuation of her accrued benefit under the prior plan.... [Under this methodology] plaintiff's annuity benefit would remain constant for a certain period of time even though she is technically accruing additional benefits under Part B." Slip Op. filed Dec. 20, 2002, at 2-3. 33. Judge Squatrito detailed the related facts:

"Upon conversion, plaintiff's annuity benefit was no longer based upon the formula set forth in Part A, but rather was transformed into a hypothetical individual account, with a particular "balance." This "initial retirement account" was based upon the present actuarial value of the annuity benefit due plaintiff at her normal retirement age, which is sixtyfive years of age, under Part A. Part B provides that when plaintiff elects to receive her benefit, she would receive the greater of the account balance, or the "minimum benefit" as that term is defined under Part B. "[A]s a result of these calculations plaintiff experienced a period where benefits "constructively" accrued in her cash balance account. This is so because the minimum benefit payable to plaintiff was greater than her hypothetical account balance, which means that plaintiff would not begin to realize the accrual of benefits under Plan B until her hypothetical account balance exceeded the amount of the minimum benefit." Slip Op. at 3 - 4.

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34.

The Class' actuarial expert, Claude Poulin, prepared a report

showing how CIGNA's opening accounts were established below actual value, beginning with CIGNA's exclusion of valuable rights to subsidized early retirement benefits in establishing the opening balances. Ex. 3 (Poulin Rpt) ¶¶ 24-29. 35. Mr. Poulin found that CIGNA had also taken a "pre-retirement

mortality" discount when it converted their Part A benefits to cash balance, which caused participants to lose another part of the value of their previous benefits. Ex. 3 (Poulin Rpt) ¶32 and Ex. 4 (Poulin Suppl Rpt) ¶15. 36. A discount for pre-retirement mortality is as much as 10% at age 30.

Ex. 4 (Poulin Suppl. Rpt. ¶15). CIGNA offered no mechanism under which participants could recoup this mortality discount as they grew older and the risk of pre-retirement mortality shrank. Ex. 3 (Poulin Rpt) ¶32) and Ex. 4 (Poulin Suppl Rpt) ¶15. 37. Mr. Poulin's report explains how participants lost still another part

of their previous benefit accruals when interest rates fell below the 6.05% interest rate generally used to establish the opening account balance, and stayed below that level for all but one of the years from 1999 to date. Under these conditions, participants are unable to "re-purchase" the annuities that they

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already possessed with the opening balances that CIGNA had established. Ex. 3 (Poulin Rpt) ¶34 and Ex. 4 (Poulin Suppl Rpt) ¶12-14. 38. To illustrate, if an employee age 40 had earned a $1,000 per month

annuity before 1998 and the annuity was converted to an opening account balance of approximately $27,900 with a 6% interest rate, the opening account balance converts back to an annuity of only $640 per month based on current interest rates of around 4.5%. Ex. 3 (Poulin Rpt) ¶¶33-34; Ex. 4 (Poulin Suppl Rpt) ¶¶12-14. 39. In Ms. Amara's case, CIGNA's exclusion of the value of her early

retirement benefits, its pre-retirement mortality discount and its use of a 6+% interest rate to establish the opening account balances created a "wear-away" period that made her participation in the cash balance plan's accruals illusory for more than 7 years. Ex. 32 at 28174 and 28629. 40. Under the "Part A"/Tier 1 formula, Ms. Amara earned benefits of

$1,833.65 a month starting at age 55 before the 1998 cash balance conversion. Ex. 3 (Poulin Rpt) ¶¶ 24-26. 41. However, Amara's opening account balance under the "Part B" cash

balance provisions was just $91,124.88, which converts to an age 55 annuity of only $900 per month. This is less than 50% of her Part A benefit of $1,833 per

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month. Id. 42. Under CIGNA's formula, Ms. Amara accrued no actual cash

balance benefits until the $900 Part B annuity combined with years of benefit credits and interest progresses to the point where it exceeds the $1,833.65 age 55 benefit to which she was entitled before Part B was established. Id. at ¶ 30. 43. At the approximately $7,000-8,500 per year rate at which she was

earning pay credits under the cash balance formula, the difference of $93,000 would not be made up for over ten years. Ex. 4 (Poulin Suppl Rpt) ¶¶21-22. 44. Ms. Amara testified that she only learned about the "wear-away"

when she attended a going-away party for two of her colleagues in September 2000. CIGNA's chief actuary, Mark Lynch, told her at that event that "you would be sick if you knew the wear-away you are under." Ex. 181 (Amara Decl.). 45. When Ms. Broderick separated from service in 2004 after 3½ years

of participation under the cash balance formula, her retirement benefits, like Ms. Amara's, were still based on the benefits that she had earned before 1998. The cash balance formula had added nothing to those benefits. Ex. 4 (Poulin Suppl Rpt) ¶23. 46. CIGNA's system printouts show the wear-away for Gisela

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Broderick. They show $218,944 as the value of her minimum benefit from her service under the old plan prior to 1998 compared with $208,764 in her cash balance account when her benefits commenced. Ex. 33 at SuppD1936 and SuppD1940. 47. Like Ms. Amara, Ms. Broderick was unaware that her benefits had

not grown at all based on her employment from 2000 to 2004 until after she became a named Plaintiff in this litigation. Ex. 182 (Broderick witness statement) at 3-4. 48. The same applied to Patricia Flannery. After nearly six years of

service under the cash balance formula from October 2000 to the present, Patricia Flannery has zero net accruals because of CIGNA's wear-away. Her cash balance account at the end of 2005 only converts to an annuity benefit of $756 per month, Ex. 7 (Poulin Indiv Calcs), compared with the annuity of $813 per month ($9,762 annually) that she had already earned with her service before 1998. Ex. 156 at P 1588. 49. For any employee whose "minimum benefit," i.e., the benefit they

had earned before 1998, is greater than their cash balance account at separation, the additional accruals from the cash balance formula were zero. Ex. 4 (Poulin Suppl Rpt) ¶31.

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50.

The Plaintiff class requested electronic data in discovery that would

show how many participants should have been covered by the minimum benefits rule in each year. Ex. 34 (Request No. 4). CIGNA has not produced the requested data, despite the Plaintiffs' Motion to Compel and two Rule 30(b)(6) depositions. 51. Even if a participant's cash balance account ultimately exceeds the

value of the previously-earned benefits by the time the participant separates from service, the value of the cash balance accruals in the first few years after the conversion may still be zero. Mr. Poulin prepared a spreadsheet showing how Annette Glanz's benefits did not increase for 3 years after the cash balance conversion. Ex. 4 (Poulin Suppl Rpt) ¶25 and Ex. 6 (Poulin 1/2006 Dep. Ex. 104). Her cash balance accruals in the first three years after January 1, 1998 of over $254 per month went to "catch up" with the value of the benefits that she had already had earned for her service before 1998. Id. The lost accruals in those years are never recouped. 52. Ms. Glanz's understanding prior to March 2006 was that her

"benefits were growing under the cash balance formula." Ex. 183 (Glanz witness statement) at 3. 53. The only group of class members who did not experience significant

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wear-aways were those under the Tier 2 (1.67%) formula like Barbara Hogan and Stephen Curlee who had more than 55 age and service points. CIGNA used a lower 5.05% interest rate to convert their benefits to account balances which generally meant that their benefits were not subject to a significant wear-away. Mr. Poulin prepared a table illustrating how the benefits of Barbara Hogan grow. The table shows that Ms. Hogan did not experience a wear-away, but her future benefits were still substantially reduced compared with the benefits she would have earned under the Tier 2 (1.67%) formula. Ex. 4 (Poulin Suppl Rpt) ¶28 and Ex. 7 (Poulin Indiv Calcs). 54. CIGNA could have avoided any wear-aways by using what is called

a "sum of" or "A+B" approach, "where A is the protected benefit earned before the cash balance conversion and B is the benefit under the cash balance formula." Ex. 35 at 74 (Jt. Comm. on Taxation report dated 3/1/2006). Many companies with cash balance formulas use this approach. Ex. 17 at 5 (2004 Mellon Survey of Cash Balance Plans). 55. A July 2000 survey by PriceWaterhouseCoopers stated that "We

may see more employers adopting the no-opening-balance approach due to the negative media and Congressional attention recently directed at the so called "wear-away" effect that can occur under the opening balance approach­i.e.,

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when employees' pensions do not grow for a period of time after the conversion." Ex. 12 at P 2095. 56. CIGNA adopted an A+B formula for Tier 1 (2%) formula

participants who were rehired after 2000 so that they "keep their already-earned old plan benefits." Ex. 132 at D05532 and 5534. 57. CIGNA never disclosed the wear-aways to its employees. In fact, it

made the opposite representation: Both its Summary of Material Modifications and its Summary Plan Description promised that "Each dollar's worth of credits is a dollar of retirement benefits payable to you after you are vested." Ex. 8 (Stratman Rpt. Ex. 2 at AMARA-00463 and Stratman Rpt. Ex. 3 at D00828). 58. As described in ¶75 below, CIGNA advised its Board of Directors in

September 1999 that no periods of wear-away existed. A. The Plan Years With No Additional Benefits Are Followed by Later Plan Years in Which the Rate of Accrual Is Over 33% Higher. CIGNA maintains that pay and interest credits that it assigns to

59.

participants' accounts provide benefit accruals in each plan year that comply with ERISA's 133a% accrual rule. See Ex. 37 at DO1955. 60. But CIGNA conditioned payment of those accruals in the years

following the cash balance conversion. For example, CIGNA maintains that it

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credited Ms. Broderick with annual benefit credits totaling over $29,500 for her employment from June 2000 to March 2004. Ex. 36 (fourth page). But Ms. Broderick's retirement benefits did not actually increase at all as a result of the hypothetical credits. The lump sum distribution that CIGNA offered Ms. Broderick in November 2004 was based on the $218,944 value of the benefits that she had earned before 1998. Ex. 33 at SuppD1940 and Ex. 38. The final amount of her cash balance account, which was to include accruals from 2000 to 2004, was only $208,764 ­ over $10,000 less. Ex. 33 at SuppD1931. 61. The same imbalance applies to Patricia Flannery. Her cash balance

account after six years under the cash balance formula remains less than the value of the benefits she earned before 1998. See ¶48 above. 62. Similarly, Annette Glanz did not receive any increase to her

retirement benefits for her employment from 1998 through 2000. Mr. Poulin prepared a spreadsheet showing that her cash balance account at the end of 2000 translated to an annuity benefit of $566.88 per month which was only $2.88 more than the $564 benefit that she had at the end of 1997. Ex. 6 (revised Poulin Suppl Rpt Ex-3). The benefit "credits" of $11,586 that CIGNA assigned to Ms. Glanz's "account" for the period from 1998 to 2000 did not add to her retirement benefits and therefore were not unconditionally payable to her. Id.

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63.

The wear-away periods for Broderick and Flannery appear when

the cash balance benefits are compared with both their previously earned early retirement benefits and their previously earned normal retirement benefits. Ms. Glanz's wear-away was based on her normal retirement benefits (she was not eligible for early retirement under the prior plan). For periods of 3+ years (and close to 6 years in Ms. Flannery's case), there were no additional accruals for them. 64. The rate of benefit accrual after the wear-away concludes is

"infinitely" greater than the zero accrual rate in effect during the wear-away period. Ex. 3 (Poulin Rpt) ¶ 30. 65. The Treasury Department's Alert Guidelines on the vesting and

accrual rules offer an example where a participant has a minimum benefit under one formula and a benefit computed under a different formula. In these instances, the Treasury Department examines the additional accrual in each year after the two formulas are aggregated to determine whether the Plan complies with the accrual rules. Ex. 39 at 12. B. CIGNA Concedes that There Are Periods in Which "Employees Accrue No Additional Benefits." CIGNA's Answer to Interrogatory No. 8 admits that there were

66.

wear-away periods after CIGNA's cash balance conversion:
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"certain participants can have a `wear-away period' .... During the wearaway period, a participant continues to accrue additional benefits under the cash balance formula, but because the benefits under the cash balance formula are less than the participant's `Minimum Benefit' (a defined term under Part B), the participant is entitled to the (greater) Minimum Benefit. Whether a participant has a wear-away period, and the length of that period, depends on a number of factors, including work history and interest rates, both at the time of retirement and the time an Initial Retirement Account is established." Ex. 17. See also id. (Answer to Interrogatory No. 10) ("the length of a participant's `wear-away period' ... depends on a participant's individual facts and circumstances and cannot be computed in advance, because it can depend on future changes in interest rates and changes in an employee's salary"). 67. An internal memorandum by CIGNA's Vice-President for

Employee Benefits acknowledges: "Using the present value of normal retirement age benefits results in a significant "wear-away" period during which time employees accrue no additional benefits with future service." Ex. 40 at 28635 (Jerry Meyn and David Cordani to Don Levinson and Jim Stewart 1/7/2002). 68. Another memo prepared by CIGNA's Assistant Vice President of

Global Benefits in November 2001 explains how under "the concept of "wearaway" ... long service employees earn little or no benefit in the first years after a pension change while early retirement benefits are "worn-away" by the passage of time." Ex. 41 at 28655.

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69.

CIGNA recorded notes of conversations in December 2000 with

Michele Bergman, another rehired participant like Ms. Amara. The notes show that CIGNA advised Ms. Bergman that the "wearaway" ends "at age 62"­ten years after she was rehired­and that "if you fly by age 55-56, you'll actually wind up with more." CIGNA concluded, "hope you didn't come back just for pension." Ex. 42 at 20518-21. 70. An October 2002 letter from CIGNA to another participant states:

"Mr. Lamb's pension has not decreased each year from 1998 to 2002; however, it has not increased" over those five years. Ex. 43 at 4. 71. Papers related to Peter Andruszkiewicz refer to a "wearaway until ?

[sic]" Ex. 44 at 20527. 72. In January 2002, about a month after Janice Amara filed this

lawsuit, John Arko, CIGNA's Director of Retirement Benefits, prepared an example of "wear-away" for CIGNA officials, using Ms. Amara's age, service, benefit amounts, and initial termination and rehire dates. Compare Ex. 32 with Ex. 45 and Ex. 46. 73. The spreadsheet shows that Ms. Amara earns no additional benefits

for more than 7 years after 1998. At age 55, the annuity value of her account balance is only projected to reach $1,340 per month, compared with the $1,830

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per month that she already had before the cash balance conversion. Ex. 32 at 28174 and 28629. Thus, Ms. Amara "accrue[s] no additional benefits" for her service from 1998 to retirement. Ex. 40 at 28635. 74. However, in a January 1, 1999 memo to CIGNA's head of Human

Resources responding to criticisms in the Wall Street Journal that some employers were "deliberately establishing opening balances below the real value of each employee's pension," Gerry Meyn denied that this occurred in CIGNA's conversion: "we didn't do that and would have disclosed it if we had. So there's no exposure for us on that point." Ex. 48 at D10837. 75. In a September 1999 communication with CIGNA's Board of

Directors, Mr. Meyn also recognized that wear-aways occur after some cash balance conversions, but denied that any took place after CIGNA's conversion: Some companies' "opening cash balances are established below actual value, resulting in multiple years without additions to an individual's pension accrual ... No [CIGNA] employee will experience any period without standard additions to his pension account." Ex. 47 (third page of exhibit). In an earlier July 15, 1997 memo to the People Resources Committee of CIGNA's Board, the Committee was also assured that there would be "no reduction in benefit value" for Tier 1 employees who were transferred. Ex. 49 at D00606.

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76.

CIGNA's Rule 30(b)(6) witness, who was designated to offer the

corporation's testimony about compliance with the rules in ERISA section 204(b)(1)(B), see Ex. 21, testified that he was unaware of any analysis about whether the plan's wear-away complies with the 133a% accrual rule ­ other than some material in a "binder" that Mercer prepared. Ex. 194 (Arko Depo) at 17-19, 190-91. 77. In response to a subpoena duces tecum, Mercer produced the

"binder" material. The binder and a November 1997 memorandum discuss the benefit accrual tests, but do not analyze any compliance issues related to wearaways. See Ex. 50 at MER 90-94 and Ex. 51. 78. An April 27, 1997 Mercer memo indicates that Mercer believed that

the actual rate at which benefits accrue did not matter and that CIGNA simply had to ensure that the final benefit was "no less than" the frozen minimum: "The important legal requirement is to ensure that when a final benefit is determined for an employee, it is no less than the present value of the accrued benefit payable at normal retirement age that the participant had earned up through the effective date of the change to cash balance, in other words a preservation of the minimum benefit under Section 411(d)(6) of the Code." Ex. 13 at MER 1798. 79. CIGNA's expert witness, Mr. Sher, did not discuss the requirements

of the 133a% rule, except in the last paragraph of his report. Ex. 10 (Sher Rpt)
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at 35. Mr. Sher asserted that the 133a% test could be performed without regard to any offset of benefits earned under a prior formula. Id. 80. Three months after his deposition, Mr. Sher attended a November

2003 meeting of the Conference of Consulting Actuaries which was recorded on tape (copies of the tapes are available from the Conference of Consulting Actuaries). At the Conference, Mr. Sher asked a panel of IRS officials whether the Treasury regulation providing that benefit accruals under different formulas "must be aggregated" (see 26 C.F.R. 1.411(b)-1(a)) applies to a frozen minimum benefit formula that has the effect of eliminating or reducing net accruals in future plan years. He was told that the aggregation rule applies: "You look at the net benefit and when you have...a period of zero years and the other kicks in, it's an issue on a 133 and 1/3." See Ex. 52 at 12. 81. Because younger, shorter-service employees will not have

substantial early retirement benefits from their service before the cash balance conversion, they experience shorter wear-away periods than employees who have such benefits. See Ex. 3 (Poulin Rpt) ¶27. C. The Future Cash Balance Accruals Were Conditioned on Participants Giving Up Statutory Rights to Previously-Earned Annuities; CIGNA Does Not Permit Employees to Receive Both. CIGNA employees whose Tier 1 or Tier 2 retirement benefits were

82.

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higher than the values established under the Part B cash balance formula can receive either their "old plan benefits," also known as "minimum benefits," or their cash balance accruals under Part B, but not both. Section 7.3 of the Plan provides that if a participant's old plan benefit has been converted to a cash balance account, the participant can receive the frozen benefit amount as an annuity, but without any cash balance pay or interest credits. Ex. 1 at 40, and Ex. 3 (Poulin Rpt) ¶¶25-28. 83. The effect of this Section is to require participants to give up their

protected Tier 1 or Tier 2 retirement benefits in annuity form as a condition of collecting any cash balance accruals. Ex. 3 (Poulin Rpt) ¶29. D. CIGNA Admits that It Does Not Provide the "Minimum Benefit under Part B Plus [the Plaintiffs'] Benefit and Interest Credits on Top of That." CIGNA is aware of the Class's claim. Its 2005 Annual Report states

84.

that "The plaintiffs allege ... that the Plan violated ERISA by impermissibly conditioning certain post-1997 benefit accruals on the amount of pre-1998 benefit accruals." Ex. 25 at 84. In a February 15, 2002 motion to dismiss, CIGNA recognized that Plaintiff "wants the Minimum Benefit under Part B plus her benefit and interest credits on top of that." Defs. Mem. at 16 (dkt #12). 85. CIGNA's expert witness, Mr. Sher, recognized that CIGNA's cash

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balance design places conditions on the payment of the cash balance accruals. He contends that these conditions should not be considered a forfeiture, without offering supporting authority. Ex. 10 (Sher Rpt) at 30-33 and Ex. 192 (Sher Depo) at 231-36, 251-61. IV. CIGNA's Cash Balance Formula Produces Rates of Benefit Accrual that Decrease With Age. 86. Mr. Poulin found that "age was not a factor" in determining benefit

accruals under CIGNA's "prior plan." Ex. 3 (Poulin Rpt) ¶13. Under CIGNA's prior 2% and 1.67% of final average pay formulas, retirement benefits were computed based on years of credited service and salary. The calculation of benefits did not depend on age. 87. Mr. Poulin found, however, that "the age of the employee is an

integral part of the rate of benefit accrual under Part B." Id. Mr. Poulin's report shows how age, or the proxy of how near the participant is to retirement, is a key element in computing benefit accrual under CIGNA's formula. Mr. Poulin shows that the benefit accrual under CIGNA's cash balance formula is computed by taking the annual pay credit and hypothetically compounding it using a factor equal to (1 + i) 65 - n and dividing the result by an annuitization factor. In this formula, "n" equals the employee's current age. Other factors being equal, the benefit accrual rate will be lower for older employees than for younger
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employees because "65 - n" represents potential years to retirement. 88. Mr. Poulin explains:

"[U]nder Part B, the rate of benefit accrual decreases as a direct result of increases in the employee's age. As the employee gets one year older, the interest credit, which is strictly a function of the number of years between the date of determination and age 65, is correspondingly reduced." Id. at ¶15. 89. Professor Edward Zelinsky also explains:

"Consider, for example, a participant who, at ages thirty-five, fortyfive, and fifty-five receives in each year a theoretical contribution of $1000 to her hypothetical cash balance account. As of age sixtyfive, the earliest contribution will, in annuity terms, represent an annual income of $1094 per year; the $1000 contributed ten years later at age forty-five will constitute at retirement an annuity of $507 per year; and the last $1000 contributed at age fifty-five will, at retirement, represent an annuity of $235 per year. Thus, even though the employee, in defined contribution terms, has been accruing contributions at a steady pace (i.e., $1000 per year), the employee has been earning benefits at a decreasing rate in defined benefit terms." Zelinsky, supra at 721-23. 90. For the named Plaintiff Janice Amara, Mr. Poulin calculated benefit

accrual rates (without regard to the wear-away) that decrease from 1.59% at age 48, to 1.27% at age 53, and down to 0.75% at age 65. Id. at ¶18 and Ex.D. 91. Mr. Poulin's analysis shows that CIGNA's age-graded benefit credit

schedule counteracts the age bias in the underlying formula to a limited degree

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but, as in Ms. Amara's case, does not eliminate it. Ex. 3 (Poulin Rpt) ¶¶ 16-19. 92. In Exhibits F-1 through F-3 to his report, Mr. Poulin computed the

decreasing accrual rates for three employee "profiles" that correspond with the ones CIGNA used internally to benchmark the changes: a Tier 1 (2%) employee age 30 with 9 years of service and $40,000 in compensation, a Tier 2 (1.67%) employee age 40 with 5 years of service and $45,000 in compensation and a Tier 2 employee age 50 with 10 years of service and $60,000 in compensation. Ex. 53 at 12983. Mr. Poulin again found rates of accruals that decrease from 1.79% at early ages to 1.2% at age 50, and down to .66% at age 65. Ex. 3 (Poulin Rpt) ¶21 and Exs. F-1 to F-3. 93. CIGNA's periods of wear-away are also a function of age because

the wear-away is based on early retirement eligibility. Employees such as Janice Amara, Gisela Broderick and Patricia Flannery, who are eligible for early retirement benefits, have wear-aways based on the value of those benefits. See Ex. 3 (Poulin Rpt) ¶¶25-28. Early retirement eligibility is a function of age. Ex. 2 at 36-37 and 40. A. CIGNA Recognized Internally that "Older" Employees Lose Benefits with Cash Balance and that the Rates of Accrual Decline with Age. Internally, CIGNA recognized as early as January of 1997 that

94.

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"older" employees, also described as those "nearer" or "closer to retirement," would lose benefits with cash balance: · A "disadvantage" of cash balance plans is that "Employees closer to retirement can't accumulate sufficient assets to replicate the DB benefit at the same age." Ex. 54 at D00467 (attachment to 1/2/1997 memo from Gerry Meyn to Don Levinson). · Cash balance plans offer "lower final pension values for older, longer service ee's." Ex. 55 at MER 1384 (GTM to DML memo dated 1/6/1997). · "Older employees will not attain as large a retirement fund value under the cash balance plan." Ex. 28 at 12288 (GT Meyn memo to DM Levinson dated 1/6/1997). · "For older employees with longer service the benefit may be viewed as a takeaway." Ex. 56 at SuppD1870 (3/12/1997 "Cigna Discussion Outline: Cash Balance Plan Implementation Issues"). · "The current Plan provides its highest growth in benefits nearer retirement age - a benefit they can't match under the new Plan." Ex. 57 at 14468) (draft "Managers' Q&As"). · "Factually, we know that the benefit earned from age 60 to 65 is going to be lower;" from "Commentary on Deloitte and Touche Article" in "Retirement Plan Changes, Possible Media Questions" packet dated 9/23/1997. Ex. 58 at SuppD1579-80. · "[T]he nearer employees get to retirement age, the less time they have to earn compounded interest on their benefit credits. The higher points help compensate for this." Ex. 59 at 27438 ("Cash Balance Phone Scripts"). 95. CIGNA also specifically knew that the benefit "accrual rates" under

its cash balance formula decline with increases in age and service. A CIGNA actuary, who is now the President of the Hooker & Holcomb actuarial consulting
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firm in Hartford, see Ex. 60, wrote: "As [one] would expect in a plan designed to mimic a defined contribution plan, accrual rates decline with increases in age and service for employees in the cash balance plan." Ex. 61 at 10044 (6/26/1997 memo from Arthur Assantes to David Durham) (emphasis added). 96. A spreadsheet dated October 22, 1997 prepared by another CIGNA

actuary also shows "accrual rates" declining from 1.73% at age 43 down to .66% by age 65. Ex. 62.2 97. The electronic version of this Lotus spreadsheet shows that CIGNA

computed the "accrual rates" in the same manner as Mr. Poulin, i.e., by projecting the account balance to retirement age, converting to an annuity, subtracting the annuity at the end of the previous year, and computing the "accrual rate" as a percentage of compensation. Ex. 9 (Declaration of Allison Caalim) ¶8. 98. In CIGNA's capacity as a provider of retirement services to other

companies, CIGNA posted material on its corporate website recognizing that: Under cash balance plans, "employees who are age 50 or older" may "experience a material reduction in the future rate at which they accrue benefits, resulting in a measurably lower benefit at retirement."

The date of this document is shown in the electronic file. Ex. 9 (Caalim Decl.) ¶8.
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Ex. 63 (third page). B. CIGNA Was Advised of its "Vulnerability" to the Age Discrimination Claim. CIGNA's Board of Directors was aware of CIGNA's "vulnerability"

99.

to the legal argument that its accrual rates discriminate as early as September 1999. In a memorandum to CIGNA's Board of Directors, the Vice-President for Employee Benefits warned: "Cash Balance Plans are alleged to violate ADEA: This is a new challenge, related in part to opening balances established below actual value, but also is a challenge to a flatter schedule of accruals. . . . CIGNA's age-progressive accrual schedule reduces, but does not eliminate, vulnerability to this argument." Ex. 47 (third page) (attachment to 9/21/1999 e-mail from Gerry Meyn entitled "Cash Balance Pension Plans: Background for September 1999 Board meeting"). 100. The same memorandum advises the Board about problems when "Opening cash balances are established below actual value, resulting in multiple years without additions to an individual's pension accrual," i.e., periods of wearaway, but the Board was told that CIGNA had not done this and therefore "No employee will experience any period without standard additions to his pension account." Ex. 47 (third page). 101. Although CIGNA and its Board were aware of the company's "vulnerability" to an age discrimination claim, CIGNA did not obtain a legal

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opinion on whether its cash balance formula is lawful. The class requested any legal advice related to this claim in two different requests. Ex. 34 (Request No. 2) and Ex. 64 (Request No. 14). No legal opinion on age discrimination was produced in discovery or identified in a privilege log. 102. Andrew Hodges, CIGNA's chief actuary for projects, testified that he was not aware that there was an age discrimination issue related to the cash balance formula and does not recall ever discussing age discrimination issues. Ex. 196 (Hodges Depo) at 91-93. 103. CIGNA's Rule 30(b)(6) witness, John Arko, testified he believed that CIGNA obtained some assurance from Mercer about age discrimination. Ex. 194 (Arko Depo) at 29-30, 33-34, 36. However, neither CIGNA nor Mercer (which was served with a subpoena duces tecum) produced any such document.3 104. In its July 8, 1996 discussion of legal issues, Mercer recognized that "If the rate of accrual is interpreted as the rate of increase in accrued benefit, and the accrued benefit is defined as an annuity at normal retirement age, then there's an issue" about whether "cash balance plans violate the rule" on the rate of benefit accrual decreasing because of age. Ex. 19 at EPTO 4170. In this

Because the Mercer company is not authorized to practice law, attorneyclient privilege would not be a basis to withhold any opinion that it distributed to CIGNA.
33

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discussion, Mercer gives an example where the accrual drops from $459 per month at age 35 to $143 per month at age 55. Id. 105. In November 1997, Mercer prepared a spreadsheet specifically for CIGNA showing accrual rates at older ages decreasing to 35.5% of the rate in the earlier years. Ex. 51 at MER 769-70. The accompanying memo explains that "an employee's accrual rate declines as he ages through a particular contribution rate ­ that is, a 3% contribution this year produces a higher accrual rate than a 3% contribution next year ... if the formula wasn't graded accrual rates would decline steadily" as the participant ages. Ex. 51 at MER 767. 106. In this litigation, CIGNA defends against the age discrimination claim through legal arguments advanced by Lawrence Sher, the actuary who CIGNA engaged as an expert witness. 107. Mr. Sher is a well-known defender of cash balance designs who served as the chief actuary for Kwasha Lipton and successor companies for 24 years. Ex. 10 (Sher Rpt) at A-1, B-1 (work history and list of cash balance publications). Kwasha Lipton is recognized as responsible for the original cash balance conversions in the mid-1980's. See Eaton v. Onan, 117 F.Supp.2d 812, 819 (S.D. Ind. 2000). 4 Mr. Sher has testified for the defense in many cash

PriceWaterhouse Coopers acquired Kwasha Lipton in 1997. A 2001 sales brochure prepared by Pricewaterhouse Coopers touts: "Hands down, we're the
34

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balance cases, including Esden v. Bank of Boston, Cooper v. IBM, Berger v. Xerox, Lyons v. Georgia Pacific, and Engers v. AT&T. 108. Mr. Sher admits that neither he nor his consulting firm is authorized to give legal advice. He also testified that neither he nor his firm ever warned clients of any concerns with the legality of cash balance formulas. Ex. 192 (Sher Depo) at 148-51 and 173-77. A slide entitled "Age Discrimination" that he prepared for a 1999 Glasser LegalWorks seminar states that age discrimination is "Not an Issue in Practice." Ex. 66 at P 2344. 109. Mr. Sher admits that CIGNA's Plan does not conform with ERISA's definition of the term "accrued benefit" as the "annual benefit commencing at normal retirement age." Ex. 192 (Sher Depo) at 78-79 and 269-72. 110. Mr. Sher also admits that Plaintiffs' expert computes the plan's accrual rate consistent with the methodology used under the 133a% accrual rule and the related Treasury regulations. Ex. 10 (Sher Rpt) at 27-28 and Ex. 192 (Sher Depo) at 159-63. 111. But Mr. Sher does not believe this should be the only way to comply with the age discrimination rule. Instead, he suggests that the rate of benefit accrual might be measured by "the rate of growth in an employee's account

experts. No other company has more experience assisting companies in introducing Cash Balance plans." Ex. 65 at 29100.
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balance." Ex. 10 (Sher Rpt) at 11 and 13. 112. Alternatively, Mr. Sher contends that the differences in annuity benefits that younger and older workers receive as a result of the annual hypothetical allocations under CIGNA's formula reflect the "time value of money." Ex. 10 (Sher Rpt) at 15-18. 113. It is undisputed that CIGNA's annual pay and interest credits are hypothetical credits and not monetary allocations. The end-products of CIGNA's hypothetical pay and interest credits are economically indistinguishable from a schedule under which the rate of accrual decreases progressively from 1.73% of pay down to .66% of pay because of age. 114. CIGNA recognized internally that the hypothetical pay and interest credits would reduce the benefits of "older employees" more in relation to the prior formula than younger employees. CIGNA also recognized that the Plan's traditional 1.67% and 2% of average pay formulas provided their "highest growth in benefits nearer retirement age." Ex. 57 at 14468 and ¶94 above. 115. After the cash balance changes, CIGNA's Plan offers the lowest rate of growth in retirement benefits "nearer to retirement age." CIGNA's internal spreadsheets show that the Plan's "accrual rates" decrease from 1.95% at age 20 to 0.66% at age 65. Ex. 62. 116. The actual cost that CIGNA incurs as a result of the hypothetical
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pay and interest credits for employees like Janice Amara, Gisela Broderick, Annette Glanz and Patricia Flannery who "accrue no additional benefits with future service," Ex. 40 at 28635, is less than for younger employees who have little or no previously-earned benefits to "wear-away." V. Cash Balance Conversions "Mask" Benefit Reductions Because Participants Cannot Compare the Cash Balance Accounts to Annuities Without Converting the Accounts to Annuity Form. 117. The May 5, 1999 issue of the Wall Street Journal published a story on professional conferences in which consulting actuaries discussed how "[c]onverting to a cash-balance plan does have an advantage as it masks a lot of the changes....There is very little comparison that can be done between the two plans." Ex. 67. The article quotes actuaries, including from Mercer firm which prepared CIGNA's disclosures, discussing the confusion among employees in a recorded October 1998 meeting of the Society of Actuaries in New York: "Amy Viener, an actuary at William M. Mercer Inc., noted: `You switch to a cash-balance plan where the people are probably getting smaller benefits, at least the older-longer-service people; but they are really happy, and they think you are great for doing it.'" "An actuary with Watson Wyatt Worldwide who spoke on a panel called `Introduction to Cash Balance/Pension Equity Plans' alongside Ms. Viener, is heard saying on a tape: `It is not until they are ready to retire that they understand how little they are actually getting.' `Right, but they're happy while they're employed,' responded Ms. Viener of Mercer during the panel discussion." 118. In a September/October 1999 article, CIGNA's actuarial expert, Mr.
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Sher, writes: "For the same reason that it's hard to compare apples with oranges, employees will find it difficult to compare benefits under a cash balance plan with those under the prior traditional plan­no matter what information is provided." Ex. 68 ("A Workable Alternative to Defined Benefit Plans") at 20. In a First Quarter 2001 article, Mr. Sher reported on a survey conducted by his consulting firm which found that among the 59% of cash balance conversions with 20% or more "benefit reductions" "at certain ages," there was little or no disclosure of the reductions to employees. Ex. 14 at 22; see also Ex. 12 at 59-60 (concerning same survey). 119. In September 2000, the United States General Accounting Office concluded that "In many instances of conversions to cash balance plans, sponsors did not ensure that participants received sufficient information about plan changes that can reduce future benefit accruals." Ex. 69 at 35. A. CIGNA's Cash Balance Conversion Substantially Reduced Future Benefits.

120. In March 13, 2000 internal memorandum about class member John Depenbrock's benefits, Gerald Meyn stated: "John's projected pension value (present value at age 55) if he had continued in Part A earning 2% per year would have been $1.8 million. The projected pension value at age 55 under present circumstances [in the case balance plan] is $1.0 million." Ex. 70. This was a 45%

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reduction. 121. After the Third Circuit's 2004 Depenbrock v. CIGNA decision required CIGNA to place Mr. Depenbrock back under the Part A formula, his retirement benefits nearly doubled. Mr. Depenbrock's benefits increased from $2,769 per month at age 55 to $5,266 per month between the ages of 55 and 65 and $4,737 per month after age 65. Ex. 71 and Ex. 72. 122. After the Depenbrock decision, CIGNA also moved named Plaintiff Janice Amara back into the Part A Plan. Ms. Amara was at that time the sole named Plaintiff in this case. She was the first person after Mr. Depenbrock whose benefits were recalculated and one of only 14 individuals whose benefits have been recalculated in the nearly two years between the date of the Depenbrock decision and the date of this filing. Ex. 73. Ms. Amara's benefits increased from $1,831 per month to $4,096 per month between ages 55 and 65 and $3,386 per month after age 65. Ex. 46. 123. Another class member, Jack Lamb, saw his benefits nearly double when he was placed back in the Part A formula in February 2006 as the result of the Depenbrock decision and he and his wife's repeated complaints that CIGNA was not implementing the Court's decision. Ex. 73 at SuppD14400 and Ex. 74. 124. Other examples of the increases are included in Ex. 73 (e.g., Michael Ferris). CIGNA has still not recalculated the benefits for the rest of the
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class members that the Depenbrock decision affects. This prevents the class from offering over 150 potential additional examples of the "much higher" benefits that the old formula provided. 125. Mr. Poulin's calculations for the other named Plaintiffs and witnesses who were under the Tier 1 (2%) formula show similar reductions: Ms. Broderick's benefits were reduced by 46% compared to if she continued under the Tier 1 formula. Ms. Glanz's benefits were reduced by 48%. Mr. Law's were reduced by 49%, Ms. Flannery's by 48%, and Mr. Charette's by 40%. Ex. 7 (Poulin Indiv. Calcs). The reductions for the Tier 2 (1.67%) witnesses were only slightly less, ranging from 34% to 49%. Id. 126. Mr. Poulin's Supplemental Report shows how a change from a final or highest average pay formula to a career average pay formula alone nearly always causes a substantial reduction in future benefits. Ex. 4 (Poulin Suppl Rpt) ¶¶8-10. As Mr. Poulin's Supplemental Report shows, cash balance conversions effect the same change. Id. 127. CIGNA's expert, Mr. Sher, agrees with Mr. Poulin's conclusion that CIGNA's new formula substantially reduced the future rate of benefit accruals. In his report, Mr. Sher estimated that the prior Tier 1 plan's net accrual rate was approximately 1.5% of highest pay (net of a Social Security offset) compared with an accrual rate of approximately 0.75% of highest pay under the cash
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balance formula, assuming 4.5% annual salary increases. Ex. 10 (Sher Rpt) at 19 and 20 n.12 and Ex. 192 (Sher Depo) at 186-91. Mr. Sher was instructed not to prepare or include any benefit comparisons in his supplemental report. Ex. 193 (Sher 11/2005 Depo) at 31-33 and 166. 128. Mr. Poulin's actuarial report identifies and summarizes three other features of CIGNA's cash balance conversion that have caused future benefits to be lower than under the prior formu