In an apparent effort to resolve uncertainty caused by court rulings, the Pension Benefit Guaranty Corporation has proposed that actuaries of multiemployer pension plans should be allowed to use any interest rate for calculating withdrawal liability, provided the rate is not less than the PBGC’s ERISA Section 4044 rates, or greater than the plan’s assumed rate of return.

More broadly, the PBGC’s proposed rule offers a relevant regulation that plans can rely on in defending challenges concerning the discount rate.

Issued on October 14, 2022, the proposed rule comes more than a year after the PBGC stated (in a footnote in the Interim Final Rule for the Special Financial Assistance program) that it intended to prescribe actuarial assumptions that may be used in calculating withdrawal liability, and more than 40 years since the passage of the Multiemployer Pension Plan Amendments Act.

The proposed rule also follows several Circuit and District Court decisions that reversed assessments using discount rates other than the plan’s funding rate. It appears to be aimed at resolving the unsettled law flowing from these rulings.

In the regulatory impact portion of the proposed rule, the PBGC notes that it would “deter employer withdrawals” and increase the amount of withdrawal liability plans can collect.

Background

In connection with an employer’s withdrawal from a fund, it is assessed its allocable share of the plan’s unfunded vested benefits, referred to as withdrawal liability.

The calculation of an employer’s withdrawal liability involves several components, one of which is the amount of the plan’s unfunded vested benefits. A plan’s actuary uses certain assumptions to calculate the present value of the plan’s future benefit payment obligations. The discount rate used in converting the future value to the present value can have a dramatic impact on the UVBs.

In a recent decision, the use of a discount rate other than the funding rate nearly tripled the withdrawal liability, from $40 million to more than $115 million.

Two methods have recently been successfully challenged. One, the Segal Company’s eponymous Segal Blend method, uses a blend of the funding rate, together with the PBGC prescribed rates under Section 4044 of ERISA. The other uses just the PBGC rates. The PBGC has previously submitted a friend-of-the-court brief supporting use of the blended rate.

There is a reverse correlation between the rate used and the amount of UVBs, and in turn an employer’s withdrawal liability. A lower rate yields a lower present value of the future liabilities and more withdrawal liability; a higher rate produces a higher present value, lower UVBs and less withdrawal liability.

Proposed Rule

The PBGC’s rule allows a plan’s actuary to use any rate, from the Section 4044 rates to the plan’s funding rate, or a blend of the two.

In proposing the rule, the PBGC relies on its statutory authority, under Section 4213(a)(2) of ERISA, to suggest that the rate used doesn’t need to be reasonable or consider the plan’s anticipated experience.

Comment Period

The PBGC seeks comments on the proposed rule by November 14, 2022.

Specifically, the PBGC is seeking comments on “whether the final rule should restrict the allowable options to a narrower range of interest rates or to only specific methodologies for determining interest rates.”

It also specifically requests comments on “what should be the relationship, if any, between (a) the estimated date of plan insolvency, expected investment mix, and/or funded ratio, and (b) permitted withdrawal liability assumptions.”

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