Charles C. Shulman, Esq.
Actuarial assumptions for ERISA withdrawal liability must use the actuary’s best estimate of anticipated experience under the plan. Plan actuaries have divergent ways of measuring unfunded vested benefits for purposes of a participating employer withdrawal from a multiemployer pension plan, sometimes using: (i) ongoing minimum funding assumptions of the plan (a higher rate yields lower withdrawal liability), (ii) termination assumptions (e.g., insurance company annuity close-out rates) (a lower rate yields greater withdrawal liability) or (iii) a blend of the two rates (such as the Segal blend). Withdrawal liability often causes disproportionate liability on companies that remain in the multiemployer plan after most other employers have withdrawn, the "last man standing" problem, particularly if ongoing minimum funding assumptions have been used for earlier withdrawals. A 2022 D.C. Circuit Court case held that ongoing funding rates should have been used. A 2021 Sixth Circuit case held that termination assumptions should be used. Two 2018 cases held that a blended rate would be appropriate. This issue is likely to continue through the courts. Also, the PBGC may be issuing guidance on this issue.
Under ERISA, withdrawal liability is imposed on an employer that withdraws from an underfunded multiemployer pension plans based on its allocated share of the plan's unfunded vested benefits. ERISA § 4201. Often, withdrawal liability results in disproportionate liability on companies that remain in the union plan after most other employers have withdrawn—the last man standing problem.
Actuary's Best Estimate of Anticipated Experience of the Plan – ERISA § 4213. Multiemployer plan withdrawal liability is based on the multiemployer plan's unfunded vested benefits (UVBs) which are the value of vested benefits minus the value of plan assets. ERISA § 4211. Under ERISA § 4213, the actuarial assumptions used by the plan actuary to calculate withdrawal liability must be reasonable in the aggregate, based on the experience of the plan and reasonable expectations, and are the actuary's "best estimate" of anticipated experience under the plan. Once the estimated benefits payments and administrative costs are determined, the actuaries must determine the present value of future liabilities, which are a determination of how much the plan needs in assets today in order to pay those liabilities in the future. ERISA § 4213(b) provides that in determining the unfunded vested benefits of a pension fund for purposes of determining an employer’s withdrawal liability, the plan actuary may (i) rely on the most recent complete actuarial valuation used for purposes of IRC § 412 and reasonable estimates for the interim years of the unfunded vested benefits, and (ii) in the absence of complete data, rely on the data available or on data secured by a sampling which can reasonably be expected to be representative of the status of the entire plan.
Methods Used by Plan Actuaries. In practice, plan actuaries have divergent ways of measuring unfunded vested benefits. When there is a withdrawal liability of one participating employer and the fund is ongoing, it would appear reasonable to use ongoing plan minimum funding assumptions or other assumption based on expectation of the plan returns, pension plan minimum funding requirements are typically determined at a higher interest rate, thus yielding a lower withdrawal liability and is more favorable to withdrawing employers. (Of course, if a multiemployer plan is terminating (a mass termination), the PBGC termination rate assumptions would typically be used.) On the other hand, actuaries sometimes use termination assumptions or insurance company annuity close-out rates, which uses a lower interest rate, thus yielding a higher withdrawal liability and is more favorable to the multiemployer pension fund.
The plan funding requirements are typically determined at a higher interest rate, thus yielding a lower withdrawal liability and is more favorable to withdrawing employers. On the other hand, the annuity close-out rates use a lower interest rate, thus yielding a higher withdrawal liability which and is more favorable to the multiemployer pension fund.
Using Ongoing Plan Assumptions Leads to Backloading – Last Man Standing Problem. Although a multiemployer plan is generally not terminating in a withdrawal liability case, withdrawal liability is different than funding an ongoing plan because it represented, not an ongoing funding relationship, but a one-time transfer of risk from the withdrawing employer to the continuing employers and participants. Using ongoing funding rates would likely have the result of backloading withdrawal liability obligations to be largest for those who withdraw from the fund the latest. This disproportionate liability on companies that remain in the union plan after most other employers have withdrawn (the last man standing) causes uneven backloading of liabilities.
D.C. Circuit Court 2022 Case – Ongoing Minimum Funding Rates Should have been Considered. In a 2022 case the D.C. Circuit court held that where the multiemployer fund actuary used termination interest assumption of 2.7-2.8% (yielding a very high withdrawal liability) even though the actuary was using a 7.5% assumption for funding purposes, the valuation assumptions must represent the actuary’s best estimate of anticipated experience under the plan, and therefore the withdrawal liability calculations were not reasonable. United Mine Workers of America 1974 Pension Plan v. Energy West Mining Company, 39 F.4th 730 (D.C. Cir. 2022) (a multiemployer pension fund brought action under ERISA against a withdrawing employer seeking to enforce arbitrator's award upholding the pension fund actuary's calculation of withdrawal liability through use of a risk-free discount rate; the Circuit Court overturned the arbitrator's ruling since the termination assumption used by plan actuary, which was not chosen based on the plan's projected performance, was not reasonable and instead the actuary should have considered the pension funding discount rate assumptions taking into account anticipated projected investment returns as is applicable for pension minimum funding).
Segal Blend. Some actuaries use the blend of insurance company annuity close-out rates and plan funding assumptions. For example, the "Segal Blend" method determines a plan's unfunded vested benefits for withdrawal liability based on a blend of (i) the lower insurance company annuity purchase rates used by the PBGC at current market rates; and (ii) the actuary's assumption of future investment returns used for determining the plan funding requirements. Although the multiemployer plan is generally not terminating in a withdrawal liability case, withdrawal liability is different than funding an ongoing plan because it represented, not an ongoing funding relationship, but a one-time transfer of risk from the withdrawing employer to the continuing employers and participants.
Cases Upholding Segal Blend. Some courts have ruled that blended rates are reasonable, so long as it was the actuary, not the plan's trustees, has chosen to use them. See, e.g., Manhattan Ford Lincoln Inc. v. UAW Local 259 Pension Fund, 331 F. Supp. 3d 365 (D.N.J. 2018) (arbitrator was not incorrect in allowing the reliance on the Segal Blend as a withdrawal liability is different than merely funding an ongoing plan because it represented, not an ongoing funding relationship, but a one-time transfer of risk from the withdrawing employer to the continuing employers and participants), 2018 WL 10759131 (3d Cir. 2018) (appeal dismissed because parties settled).
Cases Challenging Segal Blend. Other cases, however, have held that using a blended rate of the minimum funding interest rate and insurance company annuity close-out rates in a case where the multiemployer plan is not terminated could violate ERISA. In a 2021 case, Sofco Erectors, Inc. v. Trustees of the Ohio Operating Engineers Pension Fund, 15 F.4th 407 (6th Cir. 2021), the Fund's actuary used a 7.25% growth rate on assets for minimum funding purposes, and only for withdrawal-liability purposes used the Segal Blend taking the interest rate used for minimum-funding purposes (7.25%) and blending it with the PBGC's published interest rates on annuities (2–3%), even though the actuary conceded that the PBGC annuity close-out rates would be what is used in settling up a multiemployer plan. The court ruled that this blended formula violated ERISA in this case, as using the Segal Blend in an ongoing plan violated ERISA's mandate under ERISA § 4213(a)(1) that the interest rate for withdrawal liability calculations be based on the anticipated experience under the plan).
Likewise, a 2018 Southern District of New York district court case invalidated the use of the Segal Blend. New York Times Company v. Newspaper and Mail Delivers’ Publishers Pension Fund, 303 F. Supp. 3d 236 (S.D.N.Y. 2018) (in a withdrawal from an ongoing plan where the minimum funding rate would be the actuary's best estimate, blending with a lower no-risk PBGC bond rates should not be accepted as the anticipated plan experience).
Watch for Future Cases and Future PBGC Guidance. As shown above, courts are split on whether to use ongoing funding assumptions or termination assumptions or a blend of the two. This issue is worth following to see how other Circuit Courts or the Supreme Court will rule. Also, the PBGC has not yet issued regulations or other guidance on what the actuary's best estimate of anticipated experience should be based on, and if the PBGC issues guidance this may change the direction of the courts.
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