CalPERS is preparing to pay out roughly $800 million to settle claims that it misled retirees when it began offering long-term care insurance in the late 1990s and pledged it wouldn鈥檛 substantially raise rates on certain plans.
The nation鈥檚 largest public pension fund in the 1990s and early 2000s sold long-term care insurance with so-called inflation-protection that members believed would shield them from dramatic spikes in premiums. CalPERS nonetheless hiked long-term care insurance rates by 85% in 2012 and continued to raise fees in subsequent years, straining household budgets for retirees on fixed incomes.
The settlement, tentatively approved by a Los Angeles Superior Court judge earlier this month, would resolve a lawsuit that centers on that steep 2012 fee increase. The settlement cannot take effect until and have an opportunity to submit comments to the court on it in a process that鈥檚 expected to take place between April and early June, according to court records.
The pays for long-term care out of a specific fund that is separate from the $443 billion portfolio that . The long-term care fund had about $4.9 billion as of June and about 105,000 active policies, according to CalPERS.
The agreement is the second court-approved settlement in the case. It is significantly less expensive for CalPERS than the first one.
The previous agreement would have cost CalPERS as much as $2.7 billion and required retirees to drop their long-term care plans in exchange for payments of as much as $50,000 apiece.
鈥淭his plan is going to run on a basis that is economically solvent without regard to what was said 20-plus years ago when it was first offered.鈥�LOS ANGELES SUPERIOR COURT JUDGE WILLIAM HIGHBERGER
Thousands of retirees chose security over cash and rejected that agreement because , according to attorneys representing the plaintiffs.
, retirees who want to cancel their long-term care insurance will receive 80% of the premiums they paid into CalPERS鈥� long-term care fund. That could amount to tens of thousands of dollars for retirees. The settlement does not cap how much money a policyholder can receive.
Members of the class who want to keep their long-term care insurance will receive $1,000 and a commitment from CalPERS that their rates will not increase until November 2024.
About 79,000 households stand to benefit from the settlement, including relatives of deceased policyholders, said Stuart Talley, an attorney for the plaintiffs. In total, about $740 million will go to the plaintiffs, while another $80 million will go to lawyers and administrative fees.
He said the new agreement strikes 鈥渁 sort of balance鈥� between policyholders who want to drop their plans because of the fee increases and others who want assurances that CalPERS鈥� long-term care fund is able to pay benefits.
鈥淩eally what they鈥檙e getting is a program that is financially viable and solvent and will be there in the future for them,鈥� he said.
The average age in the class is 76 and 14,846 members of the lawsuit have died since the litigation began, according to the settlement order. Attorneys estimate another 9,000 could die before seeing any benefit from the lawsuit if the case proceeds to trial and takes more than two years to resolve.
鈥淭here are so many people who want out of this program. Even though this isn鈥檛 the greatest settlement in the world, I think it鈥檚 best to move forward,鈥� Talley said.
Insurers misjudged long-term care market
CalPERS began offering long-term care insurance in an era when the public pension fund was flush and confident it could earn 8% returns on investments. It , giving members the impression they could 鈥渓ock in鈥� cheap insurance without risk of significant rate hikes.
Rates increased incrementally before the 85% jump in 2012, which was brought on by lower-than-expected investment earnings and higher-than-projected expenses. The increase led many CalPERS members to opt for lesser coverage to limit their costs, according to court records.
CalPERS was not the only provider to misjudge the market when it began offering those plans. AARP in a 2018 report noted that , a number that shrank to about 15.
鈥淚t鈥檚 a toxic product for insurers, and CalPERS in 1995 decided to jump in with both feet.鈥�STUART TALLEY, ATTORNEY FOR THE PLAINTIFFS
In fact, last year鈥檚 settlement agreement called for CalPERS and the plaintiffs鈥� attorneys to seek a replacement plan for members who wanted long-term care insurance from another provider. Their brokers approached more than 90 insurers and could not find a company to take on the new customers, according to settlement documents.
鈥淚t鈥檚 a toxic product for insurers, and CalPERS in 1995 decided to jump in with both feet,鈥� Talley said.
If the case had gone to trial, CalPERS was expected to argue that it raised rates in 2012 because of change in its expected investment earnings and that members who reduced their benefits because of the 85% increase did not suffer financial harm, according to a summary of the settlement that will be mailed to policyholders in April.
CalPERS has not sold new long-term care policies since 2020, citing uncertainty in the market. It also , a 52% hike in November 2021 and a 25% jump in November 2022.
What CalPERS plans cost
Today the average monthly premium for a CalPERS long-term care policy is $280.41, according to CalPERS. Talley鈥檚 clients bought policies in the 1990s for as little as $60 a month; he said it鈥檚 common for them to pay upwards of $400 a month today.
CalPERS declined an interview request about the settlement, but provided written information about the status of the long-term care fund.
Matt Jacobs, CalPERS鈥� general counsel, at a court hearing earlier this month said the long-term care fund would remain solvent after the settlement, according to a transcript.
鈥淭he new settlement reflects the parties鈥� work to provide policyholders who are counting on their policies to provide critical care with a choice to keep their policies,鈥� he said in a press release about the agreement. 鈥淲e believe this new settlement resolves what are very complex issues in a fair and equitable manner.鈥�
At the hearing, Superior Court Judge William Highberger characterized the settlement as 鈥渘ot the happiest of outcomes, because it鈥檚 a compromise.鈥�
鈥淥ne of the consequences of the settlement is the hideously inaccurate actuarial data which some of the original pie-in-the-sky marketing materials were based on will all go in the rear view mirror and be gone and released,鈥� he said, 鈥淓verybody going forward is going to have a clear-eyed view. This plan is going to run on a basis that is economically solvent without regard to what was said 20-plus years ago when it was first offered.鈥�
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