NEW YORK-An $85 million court award to Unisys Corp.'s pension plan for alleged breaches of fiduciary obligations by plan administrator John Hancock Mutual Life Insurance Co. will be reduced following a recent federal appeals court ruling.

Although the 2nd U.S. Circuit Court of Appeals in New York ruled that Boston-based Hancock did, in part, breach its fiduciary duties under ERISA by using non-guaranteed assets in Unisys' pension plan for its own benefit, it was not in violation of other claims made by the plan, the court said.

The 19-year-old case, Harris Trust & Savings Bank vs. John Hancock Mutual Life Insurance Co., was remanded to the U.S. District Court for the Southern District of New York for further proceedings, including determining a new measure of damages based on the Aug. 20 ruling by the 2nd Circuit.

The case stems from a 1983 suit brought against Hancock by Harris Trust, then the trustee of Sperry Corp.'s pension plan. Sperry Corp. became Unisys Corp in 1986.

In 1941, Sperry bought from Hancock a group annuity contract to fund a retirement plan. Under the plan, any extra interest income the insurer generated beyond what was needed to pay benefits was credited to the Sperry plan but termed "free funds" and was part of Hancock's general investment account.

In participating group annuity contracts, insurers and plan sponsors share any gains or losses on invested premiums beyond what the insurer needs to pay out the guaranteed benefit to retirees. In 1977, 1979 and 1981, Sperry's pension plan withdrew $12 million from the "free funds" to invest elsewhere, according to court papers. In 1982, Sperry again sought a withdrawal from the free funds but John Hancock refused, citing its own cash needs. Harris Trust sued alleging the insurer breached its fiduciary duty.

Following years of appeals, a U.S. District Court judge in New York ruled in November 2000 that Hancock had violated ERISA by breaching its fiduciary duties when it: refused Sperry's 1982 request to roll over free funds; refused to revalue the liabilities of the fund; collected a charge for administering the fund; and made investment and allocation decisions that placed its own interests ahead of the interests of the plan. The judge awarded the pension plan $84.9 million in damages, interest and attorneys fees (BI, Dec. 4, 2000).

On appeal, the 2nd Circuit threw out the District Court's ruling on the first three charges, ruling that they were contractual issues outside the scope of Hancock's fiduciary duties under ERISA.

The appeals court, however, did affirm the self-dealing claim against Hancock with respect to fixed and frozen asset investment decisions and litigation and lobbying expense allocation decisions. It vacated and remanded for further proceedings other self-dealing charges.

According to court papers, from at least as early as 1976, Hancock invested assets of the pension plan in its own home office properties and charged itself rent, thereby generating investment income. The rates of return were consistently lower than the return on other investments it made for other customers, as the insurer was charging itself below-market rent on its properties, court papers say.

Moreover, Hancock chose not to allocate any of these investments to the portion of the general account for which it bore the investment risk. Instead, it allocated the investments to the pension contract, so that policyholders bore the investment risk, court papers say.

The appeals court also affirmed the lower court's finding that Hancock improperly allocated litigation and lobbying expenses to the plan, rather than from its own funds, the court ruled.

"It's a mixed bag," said Lawrence Kill, a partner with Anderson Kill & Olick P.C. in New York, referring to the appeals court decision. "It does reduce the amount of damages that the plan will be entitled to once the dust settles." On the other hand, "we're gratified that it sustained the basic principle that Hancock has violated its fiduciary duties under ERISA in terms of its allocation procedures," said Mr. Kill, who represented the pension plan.

Hancock declined to comment, but in an Aug. 22 filing with the Securities and Exchange Commission, stated: "The matter remains in litigation and no final judgment has been entered."

Harris Trust & Savings Bank vs. John Hancock Mutual Life Insurance Co., 2nd U.S. Circuit Court of Appeals, No. 01-7608. Aug. 20, 2002.