In a highly anticipated and thorough opinion, the 6th Circuit Court of Appeals concluded that use of the Segal Blend by a multiemployer pension plan (MEPP) in calculating an employer’s withdrawal liability violated ERISA.

This ruling could significantly impact MEPPs and contributing employers alike because the Segal Blend – or blended rates without the Segal moniker – are widely used.

Blended rates have the effect of increasing an employer’s withdrawal liability, sometimes doubling, tripling, even quadrupling or more what it would be if the plan’s funding rate had been used. While this ruling doesn’t invalidate the use of a blended rate per se for all MEPPs, it sets a compelling precedent that will influence the outcome of future disputes.

Background

In Sofco Erectors, Inc. v. Trustees of the Ohio Operating Engineers Pension Fund, after Sofco terminated its collective bargaining agreement with a local union, the MEPP assessed more than $1 million in withdrawal liability.

An arbitrator upheld the assessment, but a federal district court later granted Sofco’s motion to vacate the arbitrator’s award on the issue of whether the use of the Segal Blend was reasonable and constituted the actuary’s “best estimate of the anticipated experience under the plan.” The 6th Circuit heard an appeal by the Fund, and a cross-appeal by Sofco.

To contextualize the dispute and its significance, a brief description of how withdrawal liability is calculated, and the importance of interest rates, is in order. An employer’s withdrawal liability represents its allocable share of a MEPP’s unfunded vested benefits, or UVBs, which are the difference between the present value of future liabilities and the assets available to pay those liabilities.

A MEPP’s future liabilities are determined with reference to a number of actuarial assumptions, such as mortality tables, form of payment elections and other demographics. Once a MEPP’s future liabilities are determined, the actuary must select an interest rate – or rates – to compute the present value of the liabilities. The use of a lower interest rate, such as a blend of PBGC rates and the plan’s funding rate, produces a higher present value of liabilities, and results in the plan having more UVBs; but a higher interest rate, such as the plan’s funding rate, produces a lower present value and less UVBs.

As the name suggests, the Segal Blend uses a blend of two rates: PBGC rates, which approximate annuity purchase rates and are currently low (~2-3%), and the plan’s funding rate, which represents the plan’s anticipated returns on investments. The portion of the vested benefits that is matched by assets is determined by comparing the total present value of vested benefits at PBGC rates with the total market value of assets. For benefits matched by assets, the PBGC rates are used; for benefits that cannot be settled immediately because they are not currently funded, the calculation uses the plan’s funding rate.

The blended rate thus has the effect of increasing UVBs and employers’ withdrawal liability, as compared to using the plan’s funding rate.

Dearth of Federal Appellate Case Law

The Sofco case marks only the second time that a federal appellate court has considered the Segal Blend method and the first to result in a published decision.

In 2019, the 2nd Circuit heard a similar challenge to the Segal Blend in The New York Times Co. v. Newspaper and Mail Deliverers'-Publishers' Pension Fund. At oral argument, the judges’ questions hinted strongly that they were inclined to hold that Segal Blend did not reflect the actuary’s best estimate, as the plan’s actuary testified that it did not. The parties settled the matter before the Second Circuit issued its ruling.

In Sofco, the oral argument before the 6th Circuit also portended an unfavorable ruling for the fund.

Focus on Statutory Requirements

In its 33-page decision, the 6th Circuit did not reach the issue of whether use of a rate different from the plan’s funding rate was per se violative of ERISA, and it should be expected that in future cases funds will seek to distinguish Sofco as applying only to the plan and facts before it. But that task will be challenging because the 6th Circuit panel methodically dispensed with all of the fund’s arguments in support of the Segal Blend, dismantling the logic that underpins its use.

The court focused on the statutory requirement that the assumptions and methods “offer the actuary’s best estimate of anticipated experience under the plan.” The court rejected the fund’s arguments that the Actuarial Standards of Practice and overarching policy goals of pension funding support the use of the blended rate by pointing to the absence of any such reference in the statute.

Effects on Future Litigation

While the Sofco decision was limited to the facts before it, the court’s analysis and logic were remarkably thorough and surely provide persuasive precedent for later disputes.

It would be surprising if pension funds abandon the use of blended rates, or even PBGC rates, in calculating UVBs altogether, so it is likely this issue will be relitigated. For withdrawing employers, the difference in withdrawal liability from using a blended rate to using a plan’s funding rate is specific to a plan, but it can be very substantial. The Sofco ruling, and the potential reduction in liability, offer withdrawing employers’ good reason to contest assessments.

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