Analysts, investment bankers, accountants and consultants, all major players on Wall Street, have become targets of the US authority. Now, the actuaries are under scrutiny: the Department of Justice has started an investigation to discover whether the biggest actuarial firms have been engaging in practices that violate antitrust laws, practices that could possibly harm their clients such as pension funds.
The involved firms are Tower Perrin, Milliman USA, Watson Wyatt Worldwide and Hewitt Associates. A Tower Perrin’s spokesperson has confirmed to IPE that “the antitrust division of the Department of Justice has issued a civil investigative demand to the firm” and that the inquiry regards “a decision made by Towers Perrin as well as by other employee benefits consulting firms to adopt a limit of liability provision in client agreements”.
But the same spokesperson denies that the decision was planned together with the other companies: “Towers Perrin made an independent and unilateral business decision to require a limitation of liability in the agreements we enter to deliver consulting services to our clients. The firm is confident that this decision was made and implemented in a completely proper and lawful manner. Towers Perrin intends to co-operate fully with the investigation and looks forward to its prompt and successful resolution”. Hewitt and Watson Wyatt did not make any comment, but simply said their firms were “contacted by the Department of Justice” and were “co-operating fully”.
The antitrust investigation comes two years after the problem of limitation of liability (LOL) provisions burst out in the actuarial industry.
In 2002, several pension funds, especially in the public sector, began suing their actuaries – who advise them on projected obligations and how to keep their promises to retirees – claiming damages in the billions due to the alleged negligent work of these actuaries. For example, Towers Perrin was sued by the Los Angeles County Employees Retirement Association (LACERA) – a fund with over $20bn (e16.5bn) in assets – over alleged errors totalling $1.1bn. (Last year the lawsuit was settled on undisclosed terms). Watson Wyatt was required to pay more than $40m in damages to the Connecticut Carpenters Pension Fund, a pension fund with $170m in assets.
As investment returns went from bad to worse, and the financial situation of US pension funds became increasingly troubled, litigation intensified. As a result, big actuarial firms started asking pension funds to agree to LOL provisions in their contract, warning that the lawsuits were jeopardising their ability to obtain malpractice insurance.
One strategy was to require pension plan clients to agree not to sue the actuaries for more than a set amount, or for a multiple of one-year’s fee, for any funding changes the plans might realise as a result of errors made by the actuaries. But some industry insiders immediately commented that the supposed unavailability of insurance was an excuse and that the largest firms were acting in concert to force LOLs on the industry in a way that could raise antitrust concerns.
Ted Siedle, a federal securities attorney and founder of the Benchmark Companies, says: “No fiduciary should ever agree to a limitation of liability. The very role of a fiduciary to a pension fund is to ensure those providing services to the plan are held accountable. Limitations serve to reduce accountability.”
Another reaction that caught the industry’s attention was the disagreement between Gene Kalwarski, a prominent and experienced actuary with Milliman USA, and the firm: Kalwarski opposed its firm’s new policy of limiting how much clients could seek in a lawsuit and left the company to set up a spin-off firm, Cheiron, in 2002. Since then Cheiron has become a successful ‘niche’ actuarial firm, but the founder is being sued by his former employer for violating agreements.
Large actuarial firms argue that when pension fund trustees hire smaller actuarial firms, they are effectively agreeing to a LOL because a significant error by a smaller, thinly capitalised firm would result in the firm’s demise, and a small recovery for the fund. Therefore, it is right for large firms to seek to limit their liability to some reasonable level.
The Department of Labor, asked for
an advisory opinion by a pension fund in 2002, says it didn’t “believe that, in and of themselves, most limitation of liability and indemnification provisions in a service provider contract are either per se imprudent …or per se unreasonable”, according to the Employee Retirement Income Security Act of 1974 (ERISA), as long as the limitation does not include “fraud or wilful misconduct”. Now it is up to the antitrust people to see if those limitations were designed in an anticompetitive way.

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