By Pension and Benefits Editorial Staff
A pension fund actuary did not violate ERISA by using the “Segal Blend” discount rate to determine that an employer owed about $2.55 million in withdrawal liability to a multiemployer defined benefit plan, the U.S. District Court for New Jersey has ruled. The court also held that under ERISA a pension plan’s actuary need not use identical actuarial assumptions to calculate the plan’s satisfaction of minimum funding requirements and its unfunded vested benefits (UVBs) for withdrawal liability.
Calculating liability. An employer completely withdrew from a multiemployer defined benefit pension plan. An actuary from the Segal Company calculated the minimum funding level of the plan and the employer’s withdrawal liability using two different discount rates. To calculate minimum required funding for the pension fund, the actuary used a funding discount rate of 7.5%. Based on the 7.5% funding rate, Segal reported that the fund was “fully-funded.”
To calculate the fund’s UVB at the time of the employer’s withdrawal, the actuary used a different discount rate, the Segal Blend. It represents a blend of interest rates, including rates prescribed by the PBGC and the 7.5% funding rate. Using the Segal Blend, the actuary determined the fund’s UVB to be nearly $32 million, of which $2.55 million was allocated to the withdrawing employer.
If the 7.5% funding rate had been used to value the pension fund’s withdrawal liability, all agreed the withdrawing employer’s liability would be $0. So, pursuant to ERISA Sec. 4221, the employer initiated arbitration proceedings to dispute the fund’s liability computation. The arbitrator found for the pension fund and the employer filed suit in federal district court.
Under ERISA Sec. 4221(a)(3)(B)(i)-(iii), to challenge the determination of a plan’s unfunded vested benefits, an employer must show, by a preponderance of the evidence, that the actuarial assumptions used were “in the aggregate, unreasonable (taking into account the experience of the plan and reasonable expectations)” or that the actuary made a significant error when applying the assumptions.
Use of different rates. The court first concluded that ERISA does not preclude the use of different rates to determine minimum funding and withdrawal liability. Contrary to the employer’s assertion, neither ERISA nor the Supreme Court’s ruling in Concrete Pipe & Prod. Of Cal., Inc. v. Constr. Laborers Pension Tr. For S. Cal, 508 U.S. 602 (1993), impose a per se ban on the use of different actuarial assumptions for purposes of funding and withdrawal liability. Limiting language used in the sections of ERISA discussing withdrawal liability and minimum funding suggest that Congress viewed minimum funding and withdrawal liability as distinct calculations warranting the use of different assumptions by actuaries.
Use of Segal Blend. The court also found that the arbitrator did not clearly err in finding that the employer failed to meet its burden to rebut the reasonableness of the actuary’s approach. The arbitrator did not have to accept the “risk transfer” and “settlement models” of withdrawal liability underpinning the Segal Blend, and a different arbitrator could have decided the case differently. However, the testimony of the actuaries, their depositions and a written report provided a sufficient basis for the arbitrator to find that there was a good faith application of reasonable actuarial assumptions and practices.
Note: In March 2018, the U.S. District Court for the Southern District of New York also ruled that the use of different interest rates in different contexts is not prohibited as a matter of law by ERISA or Concrete Pipe. In that instance, however, the court concluded that the Segal Blend was not the appropriate method for determining withdrawal liability (N.Y.Times Co. v. Newspaper & Mail Deliverers’-Publishers’ Pension Fund, 2018 WL 1517201 (S.D.N.Y. 2018).
Source: Manhattan Ford Lincoln v. UAW Local 259 Pension Fund (DC NJ).
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