The opinion of the court was delivered by: Judge Leavitt
Submitted: September 19, 2008
BEFORE: HONORABLE DAN PELLEGRINI, Judge, HONORABLE MARY HANNAH LEAVITT, Judge, HONORABLE JOSEPH F. McCLOSKEY, Senior Judge.
The Commonwealth of Pennsylvania, Department of Public Welfare (Employer) petitions for review of a remand order of the Workers' Compensation Appeal Board (Board). The Board directed the Workers' Compensation Judge (WCJ) to receive additional evidence on the amount of credit Employer could claim against the disability compensation owed to Larry Harvey (Claimant) by reason of Employer's contribution to Claimant's pension from the State Employees' Retirement System. Concluding that the Board's remand order is at odds with this Court's binding precedent, we reverse and reinstate the order of the WCJ.
Claimant suffered a work injury on July 24, 2001, and he began receiving total disability compensation. On June 10, 2005, Employer issued a notice of workers' compensation benefit offset, informing Claimant that Employer was taking a credit against Claimant's disability compensation commensurate with its contribution to Claimant's retirement benefits.*fn1 Employer asserted a right to both a retroactive and prospective credit in the amount of $1,577.01 per month. On September 1, 2005, Claimant filed a review petition to challenge Employer's offset. Employer filed a timely answer denying the material allegations in Claimant's review petition.
At the hearing, Employer presented the deposition testimony of Linda Miller, Director of the Benefit Determination Section of the State Employees' Retirement System (SERS). As Director, Miller oversees the calculation and payment of retirement, disability, and death benefits owed to members of SERS. Funding for the Commonwealth's defined benefit plan is provided by employee and Employer contributions, as explained by Miller in two depositions. The first deposition took place on October 27, 2005. At the second deposition on June 22, 2006, Miller corrected an error in her first deposition that resulted from SERS' failure to consider Claimant's debt owed to SERS for his purchase of service credit.*fn2 In that second deposition, Miller explained that Claimant's account was valued by first identifying the annual maximum single life annuity,*fn3 subtracting Claimant's debt for his purchase of service credit, and then multiplying the remaining annual annuity amount by a life expectancy factor, which was 9.47370. This resulted in a total pension value of $214,746.42. Claimant's contribution to that total was determined by (1) calculating the sum total of all his contributions and (2) adding to that total an assumed 8.5 percent return on all those contributions. Subtracting Claimant's contributions plus interest from the total pension value produced Employer's contribution, which was determined by Miller to be $19,739.40 annually or $1,644.95 monthly.
Employer also presented the deposition testimony of Brent Mowery, a licensed actuary who does extensive consulting work for SERS. In particular, Mowery annually undertakes an actuarial valuation to determine the funding needs for the Commonwealth's defined benefit plan.*fn4 He also routinely calculates the Commonwealth's contribution to an individual's annuity where, as in this case, the member is receiving workers' compensation disability benefits in addition to his retirement pension from SERS.*fn5 The amount Employer contributes each year on behalf of a particular member fluctuates according to actuarially established funding needs.
With respect to the 8.5 percent assumed rate of return on Claimant's contribution, Mowery explained that it is impossible to specify the exact earnings on a single member's contribution in any given year. In a good year, SERS may realize a return of 15 percent on the funds it manages; in a bad year SERS may realize a negative return on its investments. Mowery testified that the assumed 8.5 percent annual return was reasonable and did not favor either Claimant or the Commonwealth. He explained why the assumed rate of return was preferable to using actual historical rates of return during the years that Claimant was contributing to the system:
Q: . Can't we look back in the past during [Claimant's] years of service and come up with what the rate of return was in all of the years that are applicable for the purpose of doing his calculation?
A: Yes, you can identify those rates of return. However, it is a problem to take into account actual levels of investment return in the determination of the benefits under the defined benefit pension plan where the benefit is not and should not be a function of the results of investments of assets underlying the plan, and it goes back to that same princi[p]le that I had discussed before that the defined benefit pension plan design is one under which [Employer] bears the full risk of investment of assets and [Claimant] is essentially insulated. [Claimant's] benefits will not vary upward or downward as a result of the actual investment experience of the plan.
Deposition of Brent Mowery, 6/1/06, at 118-119; R.R. 118a-119a (emphasis added).
Mowery also testified that he reviewed Miller's calculation of the amount of Claimant's offset. Noting that Claimant had elected to pay for his purchase of military time by having his annuity payment reduced until the debt was extinguished, Mowery advised Miller to revise her calculations. When she did so, the amount of the credit to which Employer was entitled was established at $1,644.95 per month.
Claimant presented no evidence in support of his review petition. He presented no evidence in opposition to Employer's case.
The WCJ denied Claimant relief. The WCJ credited the unrefuted testimony of Miller and Mowery and concluded that the assumed 8.5 percent return on Claimant's contributions was appropriate. He explained this conclusion as follows:
Based upon a careful and thorough review of the foregoing record, Claimant's Review Petition is denied. . . . In so holding, this adjudicator finds the unrefuted testimony of Ms. Miller and Mr. Mowery to be credible and competent. In Pennsylvania State University v. WCAB (Hensal), 911 A.2d 225 (Pa. Cmwlth. 2006), the Court noted that defined benefit plans are a subject particularly amenable to expert testimony. It is therefore significant that Claimant presented ...