Mercer LLC will pay the Alaska Retirement Management Board $500 million to settle a lawsuit accusing the firm of negligence that contributed to the multi-billion unfunded liabilities of the state’s employee pension funds.

The state in 2007 sued the former actuary for its primary state pension funds, alleging professional malpractice, breach of contract and unfair trade practices. Mercer is a wholly owned subsidiary of Marsh & McLennan Cos.

The state’s attorney general, Dan Sullivan, announced the settlement Monday.

“This is a great result for the ARM Board and most importantly for Alaska state workers and retirees,” Sullivan said in a statement. “This is a significant settlement that will benefit the state and our citizens. We have been informed that by a large margin it is the largest such settlement in history for this kind of claim.”

The state’s Public Employees’ Retirement System and Teachers’ Retirement System had $7.6 billion in combined unfunded liabilities as of June 2008, when the most recent actuarial valuation was conducted. PERS had a 69.5% funded ratio and TRS a 64.8% funded ratio. Those liabilities include retiree health care in addition to pension payments. The state’s lawsuit alleged that Mercer’s negligence as actuary contributed to the liability, along with stock market declines and significant increases in health care costs.

In the settlement, Mercer expressly denied any wrongdoing.

“Mercer concluded that a settlement was in the best interests of the company and its stakeholders for several reasons, including: the uncertainty of the outcome of a jury trial in Juneau, with its high concentration of plan participants; the complex technical nature of the claims; and the fact that the plaintiffs were seeking at least $2.8 billion in damages,” according to a statement issued by the firm.

Insurance will cover $100 million of Mercer’s payout, the firm said.

After court costs and contingency fees for outside counsel, the pension systems will receive about $403 million.

In 2008, Alaska lawmakers approved a bill authorizing the state to issue up to $5 billion in pension obligation bonds to address its liabilities.

That authorization remains, but “there is zero momentum towards a POB issuance by the state of Alaska in the foreseeable future,” state debt manager Deven Mitchell said this week in an e-mail.

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