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State seeks $8 billion for retirement funds

Lawyers: Consulting firm intentionally concealed errors

Posted: Thursday, October 01, 2009

Alaska is seeking more than $8 billion from Mercer Inc., its former actuary that it blames for part of its multibillion dollar pension plan deficit.

The Alaska Retirement Management Board says Mercer not only provided flawed advice that left Alaska unable to set aside enough money for the future, but did so knowingly.

"They lied to us for years," said Lewis Clayton, an attorney representing the ARM Board in Juneau Superior Court on Wednesday.

Clayton's firm, the New York law firm of Paul, Weiss, Rifkind, Wharton & Garrison is representing the state on a contingency basis and will share in any court settlement, a fact highlighted by Stephanie Poe, spokesperson for Marsh & McLennan Companies, Inc., Mercer's parent company.

Contingency attorneys get a share of the proceeds of any court victory.

Marsh & McLennan is a $13 billion global risk and human resources consulting firm based in New York.

Poe said the company would defend the suit vigorously, and denied that Mercer's actions caused the state's Public Employee Retirement System and Teacher Retirement System any damage.

"The plans' retirees have received, and will continue to receive, all the benefits to which they are entitled," she said.

Court precedents guarantee public employees retirement benefits, state officials say, but the state, school districts and local governments will have to make up the difference between what has been set aside and what retirees are due.

More than 80,000 current or former Alaskans are covered by the plans.

The ARM Board's lawsuit claims Mercer's actions left it $2.8 billion short of what it expects to need. Its lawsuit is seeking at least that amount, as well as to have damages tripled, along with punitive damages, interest and legal costs.

In the lawsuit against Mercer, the state said Mercer's actuaries failed to correctly calculate the rising cost of health care, making fundamental calculation errors and not even using Mercer's in-house health care actuarial experts.

"They were billions of dollars off," Clayton said.

That came despite claiming to be the "global leader in retirement services" and saying they used "state-of-the-art tools," while collecting millions in fees from Alaska and billing the state at rates as high as $430 an hour, the lawsuit said.

Mercer discovered the error on its own, but feared the loss of the contract with Alaska if it disclosed it, the ARM Board said in court filings.

It said Alaska attorneys in discovery and depositions found that Mercer employees intentionally concealed the errors from the state for fear of being fired, and tried to make sure there was no trace in company records that could have revealed the error.

Alaska's continued reliance on bad data compounded its losses, Clayton said.

Mercer attorney Wes Howell said Alaska disregarded Mercer's advice anyway, and chose on its own to contribute less to the pension plans than recommended. Had Mercer recommended an even higher contribution, he said, there's no proof that the state would have set aside more for retirement than it did.

"They have not demonstrated any way in which the conduct would have been different," Howell said.

The public pension plans are funded at $7.5 billion below what they expect to need during the next 25 years, according the Division of Retirement and Benefits calculations for 2008. A stock market decline since then may have increased that amount.

"Unfortunately, PERS and TRS are billions of dollars under water," Clayton said.

The bad advice from Mercer even convinced the state it could afford to increase benefits by $140 million, an action that it never would have taken if it had known the true picture, state attorneys said.

Tuesday's hearing before Judge Patricia Collins was an attempt by Mercer to have the case dismissed for failing to identify the state's damages with enough specificity.

Collins said she expected additional documents to be filed before she rules on that motion.

A trial is tentatively scheduled for May, but discussion between Clayton, Howell and Collins indicated that it might be delayed, perhaps until next fall.

• Contact reporter Pat Forgey at 523-2250 or patrick.forgey@juneauempire.com.



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