28 WK J.
Deferred Comp. 7 (Winter 2023)
Nov. 11, 2022
Liability Actuarial Assumptions – Did New Proposed PBGC Regs Get
CHARLES C. SHULMAN, ESQ.
Actuarial interest rate
assumptions for Employee Retirement Income Security Act (ERISA) withdrawal
liability, which are relevant for purposes of determining an employer
withdrawal liability for withdrawing from a multiemployer pension plan are to
be made by the plan actuary using reasonable actuarial interest rate
assumptions (which may sometimes be termination rate assumptions or ongoing
plan assumptions or a combination depending on what is reasonable for the plan)
under ERISA § 4213(a)(1). However, notwithstanding the above, once Pension
Benefit Guaranty Corporation (PBGC) regulations under ERISA § 4213(a)(2) are
issued; the plan actuary must instead comply with such regulations in
determining the actuarial interest rate assumptions. Several recent federal
courts have ruled that ongoing minimum funding rates should have been used in
those cases by the plan actuary in determining withdrawal liability, under
ERISA § 4213(a)(1).
PBGC regulations under § 4213(a)(2) have just been issued in proposed form, and
once finalized, plan actuaries can use plan termination interest rate
assumptions, which, according to the PBGC, will apparently be deemed to comply
with the actuarial assumption requirements, thus shielding the plans from legal
challenges regarding their choice of the actuarial interest rate assumptions.
But this is a difficult argument to make, since ERISA § 4213(a)(1) does require
reasonable actuarial assumptions that can be challenged in court, and the newly
proposed regulations under ERISA § 4213(a)(2) give the plan actuary a permitted
range of assumptions, (i.e., plan termination assumptions or ongoing funding
assumptions or anything in between) a court could logically read these
regulations and § 4213(a)(2) to require that when an actuary chooses an
interest rate in the permitted range, it must be a reasonable choice.
Under ERISA § 4201,
withdrawal liability is imposed on an employer that withdraws from an
underfunded multiemployer pension plan based on the withdrawing employer’s
allocated share of the plan’s unfunded vested benefits (UVBs) which are the
value of vested benefits minus the value of plan assets, as of the last day of
the preceding plan year.
INTEREST RATE ASSUMPTIONS TO BE REASONABLE UNDER ERISA § 4213(A) BASED
ON (I) THE ACTUARY’S BEST ESTIMATE OF ANTICIPATED EXPERIENCE UNDER THE PLAN OR
(II) ONCE PBGC REGULATIONS ARE FINALIZED FOLLOWING THE ACTUARIAL INTEREST
RATE ASSUMPTIONS SET FORTH IN THE PBGC REGULATIONS
§ 4213(a) sets forth rules regarding the actuarial interest rate assumptions to
be used in determining the UVBs of the multiemployer pension plan for purposes
of determining withdrawal liability, as follows:
the PBGC has not yet issued regulations regarding the actuarial interest
rate assumptions to be used in determining the plan’s UVBs, then the plan
actuary may use actuarial interest rate assumptions that are in the
aggregate reasonable (based on the experience of the plan and reasonable
expectations), and which offer the actuary’s “best estimate” of
anticipated experience under the plan.
the PBGC has issued final regulations regarding the actuarial interest
rate assumptions to be used in determining a plan’s UVBs, the actuary must
use the actuarial assumptions and methods set forth in such PBGC
recently, the PBGC had not issued any regulations regarding the actuarial
interest rate assumptions to be used in determining withdrawal liability. This
left open the issue in each case as to whether the multiemployer plan’s actuary
has used reasonable actuarial assumptions. However, on October 14, 2022, the
PBGC issued proposed regulations that once finalized will determine the
actuarial interest rate assumptions to be used in determining withdrawal
USED BY ACTUARIES PRIOR TO PBGC REGULATIONS
practice, prior to final PBGC regulations, actuaries have various ways of
measuring unfunded vested benefits. For a withdrawal of a participating
employer in an ongoing multiemployer pension plan, it may be reasonable to use
the plan’s ongoing “minimum funding” assumptions, which are typically
determined at a higher interest rate, thus yielding a lower withdrawal
liability, and being more favorable to withdrawing employers. (Of course, if a multiemployer
plan is terminating in a mass termination, the PBGC termination rate
assumptions are to be used.) On the other hand, actuaries sometimes use PBGC
plan termination assumptions (or insurance company annuity close-out rates,
which are substantially the same as plan termination assumptions), which uses a
lower interest rate, thus yielding a higher withdrawal liability and being more
favorable to the multiemployer pension fund. Use of the termination rate
assumptions is apparently based on the theory that for the employer permanently
withdrawing from the multiemployer plan its applicable share should be viewed
in terms of a termination of the plan that is likely to occur in the future.
ONGOING PLAN ASSUMPTIONS LEADS TO BACKLOADING: LAST MAN STANDING PROBLEM
a multiemployer pension plan generally does not terminate when a withdrawal of
a participating employer takes place, it can be argued that withdrawal
liability is different than funding an ongoing plan because it does not represent
an ongoing funding relationship but rather a one-time transfer of risk from the
withdrawing employer to the continuing employers and participants in the
multiemployer plan. Using ongoing funding rates would likely have the result of
backloading liability, with withdrawal liability obligations to be largest for
those who withdraw from the fund the latest (or for those participating
employers who are still participating when the multiemployer plan terminates in
a mass withdrawal). This disproportionate liability on employers that
remain in the multiemployer plan after most other employers have withdrawn
(the last man standing) can cause disproportionate backloading
of liabilities. This is further exacerbated when some of the participating employers
have gone into bankruptcy.
CASE-LAW CHALLENGING THE PLAN ACTUARIES’ ASSUMPTIONS ReGARDING WITHDRAWAL
recent federal cases have sided with withdrawing employers in challenging the
plan actuary’s assumptions when the actuary did not use ongoing minimum funding
D.C. Circuit Rules in a 2022 Case for the Withdrawing Employer
that Ongoing Funding Obligations Should Have Been Used. In a 2022 case, the
D.C. Circuit held that where the multiemployer fund actuary used plan
termination interest assumption of 2.7–2.8 percent (yielding a very high
withdrawal liability) even though the actuary was using a 7.5 percent
assumption (the minimum funding), the plan termination 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). In that case, a multiemployer pension fund brought
an action under ERISA against a withdrawing employer seeking to enforce
arbitrators' award upholding the pension fund actuary’s calculation of
withdrawal liability through the use of a risk-free termination discount rate.
The D.C. Circuit overturned the arbitrator’s ruling since the termination
assumption used by the plan actuary and 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 applicable for pension
Two Cases Challenging a Blended Rate and Holding Ongoing
Minimum Funding Rate was Appropriate. 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 insurance
company annuity purchase rates used by the PBGC for plan terminations; 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.
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 percent rate for minimum funding purposes, but for
withdrawal-liability purposes used the Segal Blend taking the interest rate
used for minimum-funding purposes and blending it with the PBGC’s published
interest rates on annuities (2–3 percent), even though the actuary conceded
that the PBGC annuity close-out rates would be what is used in terminating 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.
a 2018 Southern District of New York 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), holding that 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 rate should
not be accepted as the anticipated plan experience.
PBGC REGULATIONS THAT WHEN FINALIZED WILL PURPORTEDLY GIVE MULTIEMPLOYER
PLANS INCREASED CERTAINTY IN USING PBGC TERMINATION RATE ASSUMPTION WITHOUT
SECOND-GUESSING FROM COURTS
October 14, 2022, the PBGC issued proposed regulations that once finalized
would, pursuant to ERISA § 4213(a)(2), set forth in the actuarial assumptions
and methods that may be used by a plan actuary for the purpose of determining
an employer’s withdrawal liability.
PBGC Reg. § 4213.11, 87 Fed. Reg. 62316 (Oct. 14, 2022). These proposed
regulations were issued in part in response to the above unfavorable cases for
multiemployer plan withdrawal liability, as lower withdrawal liability based on
ongoing funding interest rate assumptions leaves multiemployer plans with
greater underfunding, which could increase PBGC risk.
stated in the Preamble, the proposed regulations in § 4213.11(b) make it clear
that the use of ERISA § 4044 rates (plan termination assumptions), either as a
standalone assumption or combined with minimum funding interest assumptions
represents a valid approach to selecting an interest rate assumption to
determine withdrawal liability in basically all circumstances.
Proposed PBGC Reg. § 4213.11(c), assumptions and methods other than the
interest assumption would have to offer the actuary’s best estimate of
anticipated experience under the plan. Proposed PBGC Reg. § 4213.11(b) would
specifically permit the use of an interest rate in withdrawal liability
assumptions to be ERISA § 4044 plan termination rates alone or minimum funding
rates alone or anywhere in the middle, although as stated in the Preamble, the
main import of the regulations is to allow plan actuaries to use of ERISA §
4044 plan termination assumptions even as a standalone assumption as a valid
approach in determining withdrawal liability.
appears from the Preamble to the proposed regulations that the PBGC believes
that any interest rate assumptions permitted by the PBGC regulations would
generally be shielded from challenge in arbitration or litigation since the
choice of termination interest rate assumptions is a proper assumption under
the regulations. The Preamble states that this could save both the plan and
employers on arbitration and litigation costs, which until now have ranged from
$82,500 to $222,000 for a withdrawal liability arbitration dispute, and can run
over $1 million for a lengthy litigation.
Preamble also states that the PBGC estimates that, in the 20 years following
the final rule’s effective date, there will be an increase in aggregate
withdrawal liability payments ranging between $804 million and $2.98 billion.
ON PROPOSED REGULATIONS
is likely to be some objections to the above-proposed PBGC regulations.
Employer withdrawal liability imposes a large and often unexpected burden on
unionized companies that participate in multiemployer pension plans. For many
employers, the potential withdrawal liability may discourage interested buyers
of the company or push the employer into bankruptcy. In addition, higher ERISA
withdrawal liability amounts will further dissuade companies from using a
unionized workforce with a multiemployer pension plan.
the proposed PBGC regulations, multiemployer plan actuaries are much more
likely to use plan termination assumptions in calculating withdrawal liability,
relying on the new regulations and the authority given under the regulations
pursuant to ERISA § 4213(a)(2), which can greatly increase withdrawal liability
and exacerbate the issues raised in the previous paragraph.
PBGC believes that, under the proposed regulations, any assumptions used by the
plan actuary, including plan termination assumptions would generally be immune
from judicial challenge, and thus, there would be little ability to challenge
withdrawal liability calculations. However, this purported immunity is likely
to be challenged in litigation, as the PBGC regulations give a range of
permitted actuarial interest rate assumptions from plan termination assumptions
to ongoing minimum funding assumptions or any combination. The PBGC believes
that since ERISA § 4213(a)(2) and the proposed regulations do not state
anything about reasonable assumptions, the courts will view the range permitted
in the regulations as a non-reviewable standard by the plan actuary not subject
to judicial review. However, this is a difficult argument to make, since ERISA
§ 4213(a)(1) does require reasonable assumptions, and the regulations under
ERISA § 4213(a)(2) give a permitted range of assumptions, it would be a logical
reading of ERISA that a choice under a range of assumptions by the plan actuary
must be reasonable and could be challenged in court or arbitration.
since interest rates and plan performance over time tend to fluctuate, fixing
the withdrawal liability interest at ERISA § 4044 termination liability rates
may yield an overly high withdrawal liability, which may not be warranted in
the long run when the plan performance increases.
proposed PBGC regulations would be effective with respect to employer
withdrawals occurring on or after the final regulations are published (or some
other date to be set in the final PBGC regulations), but presumably, they would
be effective for purposes of valuing unfunded vested benefits as of the end of
the plan year prior to the year in which the employer withdrawal occurs even if
the prior plan year ended prior to the issuance of final regulations.
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