By Pension and Benefits Editorial Staff
The Segal Blend method of determining the discount rate for calculating withdrawal liability was rejected by a federal trial court in New York as not being the best estimate of anticipated plan experience. The Segal Blend is not prohibited as a matter of law, but was inappropriately applied as it was lower than the actuary's best estimate of anticipated plan experience in the long-term and included interest rates for assets that were not included in the Fund's portfolio.
Partial withdrawal liability incurred
The New York Times (Times) entered into a collective bargaining agreement with the Newspaper and Mail Deliverers’ Union in 1981 that required payments to a multiemployer pension fund. Contributions were determined as a percentage of shifts worked by each employee.
Following the closing of some operations, the Fund determined that the Times had partially withdrawn from the Fund during the plan years ending May 31, 2012 and May 31, 2013. The Fund assessed withdrawal liability of $25.7 million, calculating a 70 percent decline in contribution base units (CBUs), defined by shifts worked by employees (and not wages).
In determining the Fund's unfunded vested benefits, the Fund's actuary used the Segal Blend, which combines lower market interest rates published by the PBGC for mass withdrawals and the plan's generally used minimum funding investment return interest rate. Under the Segal Blend, the discount rate was 6.5 percent. However, for all purposes, other than withdrawal liability, the actuary used a minimum funding investment return assumption of 7.5 percent.
Using the blended interest rate, the actuary determined the Times' partial withdrawal liability for the plan year ending May 31, 2012 to be $25,706,371. For the plan year ending May 31, 2013, withdrawal liability of $7,849,772 was assessed.
In April 2014, the Times initiated arbitration proceedings, challenging: (1) the assessment of partial withdrawal liability, (2) the use of the Segal Blend discount rate for determining withdrawal liability, and (3) the calculation of liability for the second partial withdrawal. The Times further claimed interest on the repayments of overpaid withdrawal liability.
The arbitrator ruled that the Times had incurred the partial withdrawal liability assessment. The arbitrator also upheld the Fund's use of the Segal Blend as consistent with the requirements of ERISA. However, the arbitrator reduced the second withdrawal liability assessment to $375,100, determining that the actuary failed to provide the Times with the applicable credit for prior payments. As a final matter, the arbitrator ordered the Fund to repay the Times the amount of the overpayment, plus interest.
Segal Blend rejected as not best estimate of plan experience
The primary issue before the court, on cross-motions for summary judgment, was whether the Segal Blend was the appropriate discount rate for calculating the withdrawal liability incurred by the Times. The Times argued that the Fund's asymmetrical application of the Segal Blend to only withdrawal liability calculations violated ERISA and Supreme Court precedent. Specifically, the Times maintained that ERISA requires that the rate used for calculating withdrawal liability be the same as that used for minimum funding purposes. In addition, the Times averred that the United States Supreme Court, in Concrete Pipe and Prods. Of Cal., Inc. v. Constr. Laborers Pension Trust for S. Cal. (508 US 602 (1993)), established the necessity for a fund actuary to apply “the same assumptions and methods in more than one context,” especially with respect to a fund's interest rate assumptions.
Finally, the Times stressed, ERISA's minimum funding rules and withdrawal liability provisions require an actuary to use reasonable rates that, in combination, offer the actuary's best estimate of anticipated experience under the plan. The Segal Blend's estimation did not constitute the best estimate of the anticipated experience of the Fund, the Times stressed, because the blend of risk-free rates did not represent the Fund's actual investment portfolio.
The Fund, noting that withdrawal liability assumptions must not only be reasonable, but “reasonable in the aggregate,” and that an actuary is required to take into account reasonable and anticipated expectations, argued that it was reasonable and proper for the actuary, in determining the liability of a withdrawing employer, to set a low return rate based on a finding of lower risk. Moreover, the Fund maintained, Concrete Pipe did not explicitly prohibit the use of different assumptions for different purposes.
Initially, the court ruled that the use of different interest rates in different contexts is not prohibited, as a matter of law by ERISA or Concrete Pipe. The requirement under ERISA Sec. 4213, that withdrawal liability assumptions be reasonable in the aggregate, suggested to the court that Congress envisioned the possibility that withdrawal liability calculations could combine different assumptions and methods than those generally applicable to contributions. Further, while Concrete Pipe advised that withdrawing employers were shielded from actuarial bias when the same critical interest rate assumption was used for purposes other than withdrawal liability, the Supreme Court also allowed for calculations of withdrawal liability to be supplemented by actuarial assumptions unique to withdrawal liability. Thus, while the deviation from a uniform interest rate may be presumptively unreasonable, such deviations are not definitively impermissible as a matter of law.
However, although the Segal Blend is not prohibited as a matter of law in the calculation of withdrawal liability, it was not the appropriate method for determining the withdrawal liability of the Times in the instant case. Relying on the actuary's own testimony, that the 7.5 percent assumption was her “best estimate” of how the Fund's assets would on average perform over the long-term, the court found that the use of the lower Segal Blend interest rate violated the ERISA Sec. 4213 requirement that assumptions be the best estimate of the plan's anticipated experience. The use of the Segal Blend was especially inappropriate because it included interest rates for assets not incorporated into the Fund's portfolio. The Segal Blend could not be the actuary's best estimate of anticipated plan experience, the court stressed, if it did not reflect the plan's actual portfolio of assets.
Accordingly, the court reversed the arbitrator's decision to affirm the use of the Segal Blend in calculating the Times' withdrawal liability. Absent additional evidence supporting a different rate, the Times' withdrawal liability was to be recalculated using the 7.5 percent assumption acknowledged by the actuary to be the best estimate of plan experience.
Source: The New York Times Company v. Newspaper and Mail Deliverers' -Publishers' Pension Fund (DC NY).
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