The U.S. 6th Circuit Court of Appeals (which covers Michigan employers) recently issued a long-awaited decision about the appropriateness of interest rate assumptions used by union pension funds to calculate withdrawal liability. The court affirmed a district court’s opinion holding the Ohio Operating Engineers Pension Fund’s use of the “Segal Blend” violated the Employee Retirement Income Security Act (ERISA).
How We Got Here
When multiemployer pension plans have unfunded “future liabilities,” employers that cease to have an obligation to contribute to them are assessed a portion of the unfunded “withdrawal liability.” Under ERISA, a plan must use reasonable actuarial assumptions to calculate the amount of lability.
Two important assumptions are what rates of liability are appropriate to (1) determine the minimum funding necessary to pay future liabilities and (2) discount the future labilities to present value. The use of a low discount rate in either situation can greatly increase the liability assessment to the withdrawing employer.
Facts and Findings
The Ohio Operating Engineers Pension Fund’s best estimate of the rate of return on current assets for minimum funding purposes was 7.25%. Despite using the rate to determine the minimum funding, it relied on a “Segal Blend” rate (i.e., blending the Pension Benefit Guarantee Corporation rate of 2%-3% with the fund’s best estimate of the rate of return, in this case, 7.25%) to discount the future liabilities to present value and ultimately determine the withdrawal liability.
The 6th Circuit held the fund’s use of the Segal Blend to discount future liabilities while simultaneously relying on the 7.25% rate of return on current assets to ensure minimum funding violated ERISA. The discount rate wasn’t the actuary’s best estimate of anticipated experience under the plan.
The appeals court went on to say using the Segal Blend to assess withdrawal liability is unreasonable because it incorporates “an interest rate used for plans that essentially go out of business, even though [this Plan is] neither going out of business nor required to purchase annuities to cover the departing employer’s share of vested benefits.” Sofco Erectors, Inc. v. Trustees of the Ohio Operating Engineers Pension Fund (September 28, 2021).
Takeaway for Employers
An employer facing withdrawal liability should scrutinize the pension fund’s actuarial assumptions and consider whether it has a basis to challenge them as unreasonable. A successful challenge could greatly reduce the company’s withdrawal liability.