The opinion of the court was delivered by: Judge Brobson
BEFORE: HONORABLE BONNIE BRIGANCE LEADBETTER, President Judge HONORABLE P. KEVIN BROBSON, Judge HONORABLE JAMES R. KELLEY, Senior Judge
Petitioner School District of Philadelphia (Employer), petitions for review of an order of the Workers' Compensation Appeal Board (Board). The Board affirmed a decision of a workers' compensation judge (WCJ), which denied Employer's petition to review compensation benefit offset (review offset petition) relating to the workers' compensation benefits Employer pays to Carol Davis (Claimant). We now reverse the Board's order and remand the matter to the Board.
Claimant sustained a work-related injury on September 9, 2003, and thereafter began to receive workers' compensation benefits. On December 24, 2007, Employer filed its review offset petition, asserting that based upon Claimant's retirement from employment on February 7, 2004, Employer was entitled to an offset of benefits reflecting Claimant's receipt of pension benefits.
Claimant responded to that petition by denying Employer's claim of entitlement to offset Claimant's benefits.*fn1
The WCJ conducted a hearing on November 3, 2008, during which Employer submitted the deposition testimony of Janet Cranna, a consulting actuary who provides actuarial services to the Pennsylvania School Employees Retirement System (PSERS), which administers the pension fund (the Fund) for employees such as Claimant. Ms. Cranna's testimony focused on the amount of money Employer contributed toward Claimant's pension and the formula and calculations she used to arrive at that figure. This is critical information in determining the amount, if any, of the set-off in workers' compensation benefits to which an employer may be entitled. Employer also submitted the deposition testimony of Christine M. Mumma, who works for PSERS as a retirement administrator and who provided testimony of a similar nature to Ms. Cranna's. The WCJ determined the testimony of both of these witnesses to be credible in part. The WCJ determined that Ms. Cranna's and Ms. Mumma's testimony was not "persuasive or credible as to the Employer's contribution to the pension plan for calculation of the pension offset." (Finding of Fact (F.F.) 16.)
The WCJ based the negative credibility determinations on their responses to questions on cross-examination, regarding interest accruing on contributions to the Fund made by non-vesting employees. Claimant's counsel noted during the course of his cross-examination of Ms. Cranna that when such employees terminate their service, those employees receive their contributions plus a four (4) percent statutorily mandated return on their contributions. Ms. Cranna acknowledged that any return on such employees' contributions above the four (4) percent statutory return remains, in a comingled manner, in the Fund. The WCJ determined that "Ms. Cranna's testimony that no effort was made to isolate the portion of [the Fund] funded by investment growth on the contributions of non-vested Employee[s], compels rejection of her conclusion that the formula used by PSERS accurately establishes Employer's contribution for offset." (Finding of Fact No. 16.) In summary, with regard to the testimony of Ms. Cranna and Ms. Mumma, the WCJ essentially deemed the testimony insufficient to carry Employer's burden, because the testimony did not quantify the value or amount of the return on investment that may be retained in the Fund after non-vesting employees are paid their contributions plus the four-percent statutory rate of return upon their termination (Retained Investment Returns), if any. (F.F. No. 16.) The WCJ determined that consideration of Retained Investment Returns potentially reduces the calculation of an Employer's contribution to the Fund. (F.F. No. 17.)
Based upon these determinations and conclusions, the WCJ denied Employer's benefit offset petition. The Board affirmed the WCJ's decision. On appeal, *fn2 Employer raises a single issue for our review: whether the Board erred in affirming the WCJ's decision because the WCJ accepted as credible the testimony of Employer's witnesses that Employer funded some portion of Claimant's pension benefits, thus entitling Employer to some offset of compensation benefits. The key statutory provision at issue in a pension offset matter is Section 204(a) of the Workers' Compensation Act, Act of June 2, 1915, P.L. 736, as amended, 77 P.S. §§ 71, which provides as follows:
The severance benefits paid by the employer directly liable for the payment of compensation and the benefits from a pension plan to the extent funded by the employer directly liable for the payment of compensation which are received by an employee shall also be credited against the amount of the award made under section 306.
In The Pennsylvania State University/The PMA Insurance Group v. Workers' Compensation Appeal Board, 911 A.2d 225 (Pa. Cmwlth. 2006) (Hensal), appeal denied, 593 Pa. 743, 929 A.2d 1163 (2007), this Court identified the purposes of Section 204(a) to include the reduction of "the cost of workers' compensation by allowing an employer to avoid paying duplicate benefits for the same loss of earnings," and the implicit policy that an injured employee should not be required to fund an employer's workers' compensation responsibility through her own retirement pension. Hensal, 911 A.2d at 227-28. Under 34 Pa. Code § 123.8(a), an employer is entitled to an offset for money a claimant receives from a defined benefit or defined contribution plan to the extent the pension is funded by the employer directly liable for payment of workers' compensation benefits. An employer bears the burden of demonstrating the "extent" to which it has funded an employee-claimant's pension. Hensal.
In Hensal, the Court examined the difficulty an employer faces in demonstrating the extent to which it funds an employee's pension when the pension at issue is paid pursuant to a "defined benefit plan."*fn3 The Court noted that defined benefit pension plans, such as the one at issue in this case, are "designed to provide an employee with a set benefit amount based on factors known only at retirement, such as length of employment and retirement age . . . membership class and final average salary." Id. at 231. "[A]n employee's actual contributions do not determine the amount of monthly benefits a member will receive." Id. Defined benefit plans require employers to contribute such amounts to "cover the difference" between "employee contributions and the collective pension [fund] liability." Id. The Court stated that, "[b]ecause the pension guarantees a fixed benefit level [to an employee], the employer assumes the risks of investment, inadequate funding, and member longevity." Id. (emphasis added). The beneficial pooling aspect of such plans, which helps spread the risk of funding a pension plan over many factors, also places hurdles before an employer who bears the cost of paying a pension to an individual to whom it also continues to be responsible for workers' compensation benefits.
Based upon these observations, the Court in Hensal concluded that "the extent to which an employer funded a particular employee's defined benefit pension can only be determined by an actuarial formula." Id. at 232 (emphasis added.) Thus, the Court held that "[s]ince an employer cannot provide evidence of actual contributions for the use of an individual member of a defined benefit pension plan, it may meet its burden of proof . . . with expert actuarial testimony." Id. (emphasis added). The Court rejected the argument of the claimant that such expert testimony would be "impermissibly speculative," citing instances in which courts have accepted expert testimony to establish lost future earning capacity. Id. At issue in this case is the question of whether the isolated admissions of Ms. Cranna concerning the rate of return on the fund for the 2003/2004 fiscal year and the June 30, 2007 investment return of 22.9 percent, upon which the WCJ relied in reaching his decision, are relevant under Section 204(a) of the Act and the decisions of this Court and our Supreme Court which have interpreted that provision. Here, the Board affirmed the WCJ, noting that "when read in their entirety, the WCJ's Findings indicate that he rejected [Employer]'s actuarial evidence because he believed, due to the inclusion of the excess investment growth income, [the inclusion of such income] overstated [Employer]'s contribution to the pension plan." (Board Decision at 8.)
We note initially that there is no definitive evidence that Retained Investment Returns affected the contribution Employer made to the Fund as a whole for the period the Fund has been in existence. As the testimony of Employer's actuarial expert, Janet Cranna, reveals, the general method by which she determined the amount to which Employer funded the plan, with regard to Claimant, involves the following process. First, Ms. Cranna identified the total value of Claimant's pension, which is also referred to as the "transfer value."*fn4 (Reproduced Record (R.R.) at 24a.) Ms. Cranna confirmed that the first reduction she made from that figure is the Claimant's own contributions to the Fund, and that figure is multiplied by a statutorily-assumed investment growth of 8.5 percent. (Reproduced Record (R.R.) at 24a-25a.) Ms. Cranna deducted that sum from the transfer value of Claimant's pension. (R.R. at 25a.) Ms. Cranna then testified that the remaining amount reflects contributions from Employer and the Commonwealth. (Id.) Thereafter Ms. Cranna employed a two-step process to determine Employer's contribution to the pension. (Id.) First, Ms. Cranna divided the remaining net sum by two, because the Commonwealth and Employer contribute equally to the Fund. In this case, she arrived at a figure of $144,032.94. (Id.) Because Claimant did not work for more than one employer, Ms. Cranna determined the percentage of Employer's share in reference to transfer value (by dividing the transfer value of $383,646.56 by Employer's share of $144,032.94), which is 37.5 percent of the transfer value. (R.R. at 25a-26a.) Thus, Ms. Cranna testified that Employer funded or funds 37.5 of Claimant's pension benefit. (Id.)
Ms. Cranna multiplied Claimant's monthly pension benefit by that percentage, which resulted in a determination that Employer funds $989.81 of Claimant's monthly pension benefit. (R.R. at 27a.) Ms. Cranna testified that, because workers' compensation benefits are paid on the basis of weekly benefit calculations, she divided the monthly contribution by 4.34 (the average number of weeks in a month) to determine the weekly offset amount. (Id.)
On cross-examination, counsel for Claimant asked Ms. Cranna about contributions made to the Fund by persons who do not vest, but rather terminate employment and who must then withdraw their actual contributions. (R.R. at 35a- 43a.) As noted above, such persons are entitled by law to a four (4) percent return on the amount of their contributions regardless of the actual rate of return. Counsel asked Ms. Cranna what happens to any return on those contributions over and above the four percent that non-vesting employees receive upon termination of employment. Ms. Cranna testified that such sums remain in the Fund. Ms. Cranna testified that some years there could be returns below four (4) percent or even negative growth. Ms. Cranna specifically testified that the actuarial method employed for determining pension funding is "inherent--that's really taken into account when we do our actuarial valuations because that in itself determines how we determine what the employer contribution rate is." (R.R. at 41a.) We note that, during the course of the cross-examination of Ms. Cranna, counsel for Claimant engaged in more than simple questioning of Ms. Cranna. Rather than simply posing questions to the witness, counsel for Claimant provided ...