Consulting firm agrees to pay state $500M after malpractice

Posted: Monday, June 14, 2010

Alaska officials announced late Friday that they'd won a record actuarial malpractice settlement from a consulting firm they say knowingly gave bad advice to the Alaska Retirement Management Board, costing the state billions.

Mercer Inc., the actuarial consulting subsidiary of the huge Marsh & McLennan Companies Inc. insurance brokerage firm, has agreed to pay $500 million to the state, Attorney General Dan Sullivan announced at an Anchorage press conference.

"We think this is a fantastic settlement for the state," he said, adding that the previous record actuarial malpractice claim was $110 million.

In exchange for the $500 million settlement, which will net the state $403 million after legal expenses and fees, the state is giving up claims potentially worth billions.

While Sullivan said he was confident in the state's ability to win a trial, that option had risks as well.

"Though we think our case in strong, a judge and jury may not decide in our favor," he said.

Any verdict would almost certainly result in lengthy appeals as well, he said.

The state originally sued for $1.8 billion, and then bumped it to $2.8 billion after additional errors were found. Some of those claims were for unfair trade practices, which include a penalty of treble damages, which significantly increased the risk for Marsh.

The case had been scheduled to go to trial in Juneau in July, following the failure of an earlier attempt by Mercer to have the case dismissed.

The state's case claimed that Mercer failed to correctly estimate the costs the state would face in rising health care costs, in part because it didn't use a health care actuary to develop those costs. Later, after Mercer discovered that it had provided Alaska with flawed data, it knowingly did the same thing the next year, the suit claimed.

"Mercer made some very, very bad mistakes," said Sam Trivette, vice-chair of the Alaska Retirement Board, which oversees the Public Employee and Teacher Retirement Systems. Trivette, of Juneau, represents public employees on the board.

"It's clear that they committed fraud, all of us, I think, felt there was a substantial amount of money lost because of their actions."

The state retirement systems currently have an unfunded liability of $8.9 billion, which is the difference between the value of the reserves they have on hand and what they'll be worth when they're needed to pay pension benefits.

Sullivan said the settlement would not solve the state's retirement woes, however.

"It's not a silver bullet for the state's pension plan challenges," he said, because Mercer was only responsible for a portion of the retirement shortfalls.

The state said that it suffered a direct loss of $1.9 billion because of Mercer's actions, including $1.2 billion that it failed to collect from participants and $700 million in lost investment earnings, but there were likely other impacts as well.

The state mistakenly thought its pension plans were better funded than they actually were, and may have agreed to pay raises that it wouldn't have otherwise been able to afford.

After accurate numbers became available, the state reacted by making dramatic changes to pensions. In 2005, the state did away with defined-benefit pension plans for new employees and shifted retirement responsibility to them with a controversial 401(k)-style plan.

Sen. Hollis French, D-Anchorage, Friday called the settlement "gratifying" but said Mercer's mistakes led the state to gut its retirement system and harm public employees.

"We must fix that mistake for our teachers, our firefighters and our police officers by returning them to a system that provides predictable and secure benefits," he said.

The $403 million settlement amount will go to strengthening the retirement systems, but retiree benefits are guaranteed and would be paid anyway.

Sullivan said Assistant Attorney General Mike Barnhill handled the case for the state, spending five years developing the case that sought to recover money for the state's workers and retirees.

Representing the state on a contingency basis was the New York-based law firm Paul, Weiss, Rifkind, Wharton & Garrison LLP. It will receive most of the $97 million in legal expenses.

Sullivan said the state negotiated a contingency fee of 18.5 percent, well below some contingency fees that have ranged as high as 33 percent.

A Mercer spokesperson did not return phone calls from the Empire Friday or Saturday, but the company issued a statement acknowledging the statement and continuing to deny liability.

The statement said one of the reasons it settled was the risk of continuing a case in which it was facing claims of at least $2.8 billion as well as "the uncertainty of the outcome of a jury trial in Juneau, with its high concentration of plan participants."

The state fired Mercer after the errors came to light.

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