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A lawsuit in Alaska against the state’s former actuary of retirement funds alleging a $1.8 billion shortfall � combined with a shaky financial ground for many of the state’s pension systems � may soon lead to more litigation, several attorneys predict. Earlier this month, the Alaska Retirement Management Board sued Mercer Inc., its former actuary of two state retirement plans. The complaint alleges the consulting firm’s negligence and errors triggered the funding gap. Alaska Retirement Board v. Mercer, No. 1JU-07-974 (Juneau Co., Ala. Super. Ct.). Wilmington, Del.-based Mercer officials did not return requests for comment. But a recent statement released by the company after the lawsuit was filed stated that “Mercer stands behind the quality of its actuarial work for the State of Alaska and will defend its interests vigorously.” This type of lawsuit, while still uncommon, may spur others to seek out similar allegations, said Patrick DiCarlo, a partner in Atlanta’s Alston & Bird who focuses on litigation involving the Employee Retirement Income Security Act, or ERISA. “I do think that we’re likely to see more lawsuits of this type,” he said. “I think part of it is one suit will create precedent for the next suit. But we’re also seeing more often these types of problems, such as mistakes in calculations in pension plans, or at least such allegations.” DiCarlo said a similar situation has already occurred in the private sector with an increase in the number of claims regarding pension and retirement, particularly over fees. He mentioned the example of four workers at Deere & Co. accusingd the company and Fidelity Investments of charging unreasonable fees for managing their retirement savings. In June, federal judge in Wisconsin threw out the complaint. Hecker v. Deere , No. 06-C-0719-S (W.D. Wis.). Because a number of public pension systems have struggled with funding, they are more likely to start examining whether they could pursue claims, DiCarlo said. $361 billion unfunded A report released this week by The Pew Charitable Trusts’ Center on the States found that at the end of fiscal year 2006, states have set aside over $1.99 trillion for pensions, leaving $361 billion unfunded. While it says most pension plans are in “reasonable shape,” the report points out that 20 states had funding levels under 80%, which is below most experts’ recommendations. The study says the states that have had particularly troubling drops in pension funding levels are Hawaii, Kentucky, New Jersey, Pennsylvania and Washington. A number of factors can lead to poorly funded systems, including the economy, population shifts and the tax base , but the study also says that policy decisions play a big role, as some states have a buy now and pay later mentality. “The pension issue is an extremely serious issue,” said Richard Greene, the report’s co-author. “The longer you put it off, the more it costs.” Creating momentum? Michael Melbinger, a partner in Chicago’s Winston & Strawn, said the Alaska lawsuit may create a momentum for more litigation, just like lawsuits over the side-effects of drugs or ERISA have done in recent years. “Once someone dreams up a new area like this, the firms . . . typically will follow on and file similar lawsuits,” said Melbinger, who chairs his firm’s employee benefits and executive compensation practice. “It could open up a lot of flood gates.” Keith Brainard, research director at the National Association of State Retirement Administrators, said he hopes that is not the case. Efforts should be made to prevent disputes between retirement systems and actuarial firms. Suing an actuary for more than it is worth could drive it out of business, he said. “Public pensions need actuaries,” Brainard said. “No one is well served when an actuary goes out of business.” But Michael Barnhill, Alaska’s senior assistant attorney general, said state officials filed the lawsuit because they thought it was important to hold its actuary liable. “We have a valid claim and we will pursue a valid claim aggressively,” he said. Barnhill said he could not speculate whether more states will follow Alaska’s footsteps. But because new federal accounting rules have prompted governments to recognize their long-term retiree costs in financial statements, more states have been taking a look a closer look at their funding levels, he said. Lewis Clayton, a partner in New York’s Paul, Weiss, Rifkind, Wharton & Garrison, which is also representing Alaska, said any problems with actuaries or consultants other states may have must be examined on a case-by-case basis. “All this indicates, really, is where there are serious problems with the work, you have to give serious consideration to bringing claims,” he said of the Alaska complaint. In 2001, Clayton helped secure more than $30 million in damages for the Connecticut Carpenters Pension Fund after the jury ruled against Watson Wyatt, the fund’s actuary.

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