The element that perhaps most significantly impacts the amount of an employer’s withdrawal liability – or indeed whether an employer even has withdrawal liability at all – is the actuarial method and interest rate used to value a plan’s unfunded vested benefits by its actuary.

Generally withdrawal liability involves very large sums. A small liability may amount to a few hundred thousand dollars, while more typical assessments are for millions, and some large assessments are for tens or even hundreds of millions.

With the stakes so high, interest rate selection and actuarial methods have drawn greater attention in recent years, due in part to the low-interest-rate environment that has the effect of exponentially increasing liability when used instead of a plan’s funding rate, but also due to the success employers have had in challenging assessments on these grounds.

Two examples from recent decisions highlight the importance of the actuarial method and interest rate on the amount of an employer’s liability. In one, the employer’s withdrawal liability calculated by the plan’s actuary based on PBGC rates was approximately $115 million, but would have been approximately $40 million had the plan’s funding rate been used. In the other, the liability under the actuarial method used by the plan was $26 million, but there would have been no liability if another method had been used.

While there have been some points of consensus in the challenges brought by employers to actuaries’ methods and interest rates selected to value liabilities, overall the results have been mixed. The two most recent decisions illustrate that.

The Segal Blend Method

In Sofco Erectors, Inc. v. Trustees of the Ohio Operating Engineers Pension, the employer challenged a plan’s assessment of three partial withdrawals and a complete withdrawal, in the aggregate amount of more than $700,000. Among the grounds on which the employer initiated its challenge was the actuarial method used by the plan – the Segal Company’s eponymous Segal Blend method.

The Segal Blend method values vested benefit liabilities based on lower, PBGC rates, to the extent that there are assets on hand that are attributable to a withdrawing employer, and the funding rate, to the extent that such assets are not on hand. It is referred to as a “blend” because the effective rate falls somewhere between the PBGC rates – commonly between 2 to 4 percent – and plan funding rate, typically in the range of 6 to 7.5 percent.

Because of the inverse relationship between interest rates and present value, the effect of the Segal Blend in the current interest rate environment is to increase an employer’s withdrawal liability – often very significantly – over the liability figure that would have resulted if the plan’s funding rate been used.

The employer disputed that the Segal Blend method reflected the actuary’s best estimate of the anticipated experience under the plan, as required by Section 4203 of ERISA. The employer maintained that the actuary assumed the plan’s assets would return 7.25 percent over the long term, and the plan’s liabilities should be valued using that same rate. To blend the funding rate with lower PBGC rates is inconsistent with the statute, the employer argued.

In the underlying arbitration, the arbitrator determined that the actuary’s assumptions and calculation, including the Segal Blend method, were, in the aggregate, reasonable. The District Court disagreed, and found the Segal Blend violated ERISA.

In their opinions, both the arbitrator and the judge acknowledged the most recent conflicting authority on the Segal Blend:

First, in 2018, in New York Times Co. v. Newspaper & Mail Deliverers’-Publishers’ Pension Fund, a judge in the Southern District of New York vacated an arbitrator’s award affirming the use of the Segal Blend method. The judge ruled that the Segal Blend violated ERISA.

The Fund appealed that ruling. At oral argument the Second Circuit panel appeared to be unpersuaded that the Segal Blend was an appropriate method. Based on the questions posed most observers concluded that the Second Circuit would be affirming the lower court’s ruling, and striking a blow to the Segal Blend. Unsurprisingly the case was settled and the Second Circuit never issued an opinion.

Second, in Manhattan Ford Lincoln, Inc. v. UAW Local 259 Pension Fund –handed down three months after the New York Times decision – a federal judge in the District of New Jersey affirmed an arbitrator’s award upholding a fund’s use of the Segal Blend method.

In Sofco Erectors, the judge analyzed those opinions and adopted the reasoning of the New York Timesdecision, finding that the Segal Blend method violated ERISA. The judge ordered that the employer’s assessment be recalculated using the funding rate.

PBGC Rates

Three days after the decision in Sofco Erectors, on May 22, 2020, a federal judge in the District of Columbia upheld an actuary’s use of PBGC rates to value the plan’s unfunded vested benefits, a discount rate that significantly differed from the funding rate.

In United Mine Workers of America 1974 Pension Plan v. Energy West Mining Company, the employer was assessed $115,119,099.34 in withdrawal liability as a result of its cessation of operations at a coal mine in Utah. The employer challenged the pension fund’s actuary’s use of the PBGC rates – 2.71 percent and 2.78 percent – to determine the fund’s unfunded vested benefits, instead of the plan’s assumed rate of return, 7.5 percent. The employer argued that it was unreasonable for the actuary to have used one rate for investment return assumptions and another rate to value future benefits. In addition, the employer argued that it was unreasonable for there to have been such a large difference between the two rates.

The employer’s expert witness testified that the use of the PBGC rates by the fund’s actuary had overstated the fund’s unfunded vested benefits, and, as a result, the employer’s withdrawal liability. The employer’s expert witness testified that using an appropriate discount rate – in the range of 6 to 6.5 percent – the employer’s liability would have been approximately $40 million.

The arbitrator found that the fund’s actuary’s assumptions in his calculation were not unreasonable. The district court agreed. The district court rejected the employer’s argument that the plan funding rate and rate used to determine the unfunded vested benefits must be identical. The court pointed to ERISA Section 4213(a)(1), and the U.S. Supreme Court’s decision in Concrete Pipe v. Construction Laborers Pension Trust for Southern California,as providing actuaries “room to maneuver” so long as the discount rates are reasonable “in the aggregate.”

With the actuarial methods and rates serving as key determinants of the amount of an employer’s withdrawal liability – and amid an ongoing split of authority on the issue among the federal courts – it is likely that more employers facing withdrawal liability valued at rates other than the plan’s funding rate will initiate challenges.

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