Challenges to Withdrawal Liability Based on Differing Interest Rate Assumptions: A Tale of Two Cases
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Challenges to Withdrawal Liability
Based on Differing Interest Rate
Assumptions:
A Tale of Two Cases
Linda Baldwin Jones ABA Section of Labor and
Shareholder Employment Law
Weinberg, Roger & Rosenfeld, PC Employee Benefits Committee
1375 55th Street 2021 Virtual Midwinter
Emeryville, CA 94608 Meeting – February 4-5, 2021Outline
• Statutory Foundations for Withdrawal Liability
• Actuarial Assumptions “Reasonable” in the Aggregate: 29 U.S.C.
§1393(a)(1)
• Contesting Liability Calculations -Arbitration: 29 U.S.C. § 1401
• Vacating and Enforcing Arbitration Awards: 29 U.S.C. § 1401
• United Mine Workers of America 1974 Pension Plan v. Energy West Mining Co.,
464 F.Supp.3d 104 (D.D.C. 2020).
• Appeal filed June 24, 2020; Briefs to be filed February – March 2021
• Sofco Erectors, Inc. v. Trs. of the Ohio Operating Eng’rs Pension Fund, Case No.
2:19-CV-2238, 2020 WL 2541970 (S.D. Ohio May 19, 2020).
• Appeal filed June 18, 2020 and June 25, 2020; Oral Arguments held and
case submitted January 22, 2021
• Key Takeaways
• Summary of CasesStatutory Foundations Withdrawal Liability
Complete Withdrawal from
Multiemployer Plans
• Generally, complete withdrawal occurs where:
• (A) an employer permanently ceases to have an obligation to
contribute/all covered operations under the plan, and
• (B) the employer—
• (i) continues to perform work in the jurisdiction of the collective
bargaining agreement of the type for which contributions were previously
required, or
• (ii) resumes such work within 5 years after the date on which the
obligation to contribute under the plan ceases, and does not renew the
obligation at the time of the resumption. 29 U.S.C. § 1383(a).
• In construction industry, complete withdrawal occurs only if
employer
• (A) “ceases to have obligation under the plan”; and
• (B) Either:
• (1) continues to perform work in the jurisdiction of the CBA of the type
for which contributions were previously required; or
• (2) resumes such work within 5 years after the date on which the
obligation to contribute under the plan ceases, and does not renew the
obligation at the time of the resumption. 29 U.S.C. § 1383(b).Partial Withdrawal from
Multiemployer Plans
• Generally, partial withdrawal occurs when:
• 1. there is a decline of 70% or more in CBUs
• 2. partial cessation of employer’s obligation to contribute
29 U.S.C. § 1385(a)Actuarial Assumptions -“Reasonable”
in the Aggregate
29 U.S.C. § 1393(a)(1)
(a) Use by plan actuary in determining unfunded vested benefits of a plan for
computing withdrawal liability of employer. The corporation may prescribe by
regulation actuarial assumptions which may be used by a plan actuary in
determining the unfunded vested benefits of a plan for purposes of determining an
employer’s withdrawal liability under this part. Withdrawal liability under this part
shall be determined by each plan on the basis of—
(1) actuarial assumptions and methods which, in the aggregate, are reasonable (taking into
account the experience of the plan and reasonable expectations) and which, in combination,
offer the actuary’s best estimate of anticipated experience under the plan.
Also, note:
29 U.S.C. § 1084(c)(3)
• (3) Actuarial assumptions must be reasonable. For purposes of this section, all
costs, liabilities, rates of interest, and other factors under the plan shall be
determined on the basis of actuarial assumptions and methods—
• (A) each of which is reasonable (taking into account the experience of the plan and
reasonable expectations), and
• (B) which, in combination, offer the actuary’s best estimate of anticipated experience
under the plan.Contesting Liability Calculations
• Arbitration under 29 U.S.C. § 1401
• Arbitrator’s Review of Withdrawal Liability
Calculations under 29 U.S.C. § 1401(a)(3)(B).
• Presumed to be correct unless contesting party
shows by preponderance of evidence:
a) Actuarial assumptions and methods used in
the determination were, in the aggregate,
unreasonable (taking into account the
experience of the plan and reasonable
expectations); or
b) The plan’s actuary made a significant error in
applying the actuarial assumptions or
methods.Vacating and Enforcing
Arbitration Awards
• Parties may seek to enforce, vacate or modify Arbitrator’s award
under 29 U.S.C. § 1401(b)(2).
• Standards of Judicial Review
• As to conclusions of law, de novo review.
• When parties stipulate to facts before the Arbitrator, then upon judicial
review, de novo review is wholly appropriate.
• As to factual findings, presumption that Arbitrator’s findings were
correct, rebuttable only by a clear preponderance of the evidence.
U.S.C. § 1401(c).
• As to mixed questions of fact and law, “clear error” review.United Mine Workers of America 1974 Pension Plan v. Energy West Mining Co.
United Mine Workers of America 1974
Pension Plan v. Energy West Mining Co.
• Pension Plan
Critical and Declining Status under PPA
Actuary concluded Plan would be insolvent by 2022
• Employer Withdrew
Withdrew from the Plan in the 2015 Plan year
Actuary computed withdrawal liability at $115,119,099.34.
• Assumed Rate of Return for Withdrawal Liability
Pension Plan’s Actuary assumed net rate of return for calculating
withdrawal liability was different than the net rate of return on the
Plan’s investmentsActuarial Assumptions – Rate of Return
Minimum Funding Withdrawal Liability
• Actuary assumed a net rate of • Actuary assumed the Plan’s
return on the Plan’s assets would grow at PBGC’s
investments of 7.5% for 2015 assumed rate for annuities
Plan year (2.71% for the first twenty
years and 2.78% thereafter),
• The 7.5% net rate of return using the PBGC’s rate for the
was based on numerous discount rate.
factors including the Plan’s
historical performance • Actuary computed withdrawal
liability at $115,119,099.34
• (Using 7.5% rate of return,
withdrawal liability would
have been around
$40,000,000.)Employer Requested Arbitration To
Contest the Computation
Interest Issue: Were the actuarial assumptions used to calculate the
Company’s withdrawal liability unreasonable in the aggregate for a
withdrawal that occurred between July 1, 2015 and June 30, 2016?
29 U.S.C. § 1393(a)(1)
(a) …Withdrawal liability under this part shall be determined by each plan on the
basis of—
(1) actuarial assumptions and methods which, in the aggregate, are reasonable
(taking into account the experience of the plan and reasonable expectations) and
which, in combination, offer the actuary’s best estimate of anticipated experience
under the plan.
Other Issue at Arbitration: Whether the Pension Plan is exempt from the 20-year
cap on withdrawal liability?Employer’s Theories
at Arbitration
• Reasonable Rate between 6.0%-6.5% : Best measure for
selecting discount rate for withdrawal liability is a market-
consistent discount rate akin to prevailing rates for bond
trading; PBGC rates akin to purchasing annuities, overstates
Plan’s unfunded vested liability by 141%
• Under Concrete Pipe, 508 U.S. 602 (1993), Actuary’s use of
different rates can be “attacked as presumptively unreasonable
both in arbitration and on judicial review.”
• Here, the assumptions were “unreasonable in the aggregate”
because the rates used for funding purposes and withdrawal liability
purposes were not identical, or too starkly different.Employer’s Theories
at Arbitration
• Under §§ 1084(c)(3) and 1393(a)(1), actuarial assumptions must
represent the “best estimate” of anticipated experience under the
plan—a “substantive” requirement. Here, assumptions underlying
the discount rate did not do so.
• For support of its statutory interpretation, cites Nat’l Retirement Fund
v. Metz Culinary Mgmt., No. 16-CV-2408, 2017 WL 1157156 (S.D.N.Y.
Mar. 27, 2017), overruled 946 F.3d 146 (2d Cir. 2020).
• Actuary did not review historical experience of the Plan, future return
assumptions, or changes in investment allocation when selecting the
discount rate for withdrawal liability.
• Actuary did not use a discount rate that accounted for the Plan’s
distressed financial condition.
• Actuary used the PBGC rates without assessing their appropriateness
for the Plan.Pension Plan’s Position
at Arbitration
• Employer’s rate would incentivize employers to abandon a
plan approaching insolvency, rate so high, employers would
owe next to nothing, last employer stuck holding the bag
• With support from PBGC Op. 86-24, actuarial assumptions
used to calculate withdrawal liability need not be the same
as those for minimum funding
• In accordance with actuarial practice (ASOP), the PBGC
rates are appropriate for calculating withdrawal liability
and “represent a risk free rate basis”
• Employer’s own actuarial expert testified that the PBGC
rates met the requirements of lawArbitration Award:
Pension Plan Prevails
• Concrete Pipe stands for the proposition that the withdrawing
employer bears the burden of “show[ing] something about standard
actuarial practice,” not “the accuracy of a predictive calculation”.
• Employer’s actuarial expert conceded “[i]t was not unreasonable for
the actuary” to use the PBGC rates for the withdrawal liability
calculation was “fatal” to the Company’s claim.
• Actuary’s calculation was based on profession’s standards and
coincided with the practices of other actuaries making withdrawal
liability calculations for similar plans.
• Insolvency is a projection, and it would be improper to allow the
Employer to permanently avoid some withdrawal liability based on an
insolvency that may not happen.
• Plan is correct that the Company’s preferred method would
incentivize withdrawal from the Plan.On Judicial Review: Affirmed
• Was it reasonable under 29 U.S.C. §§ 1084(c)(3) and 1393(a)(1) for
Actuary to have employed a withdrawal-liability discount rate that
differed significantly from the Plan’s minimum-funding rate? Yes.
• Preliminarily, the court treated this question as one for de novo review, i.e.,
as a question of law.
• Concrete Pipe does not require as a matter of law that these rates be
identical (“This point is not significantly blunted by the fact that the
assumptions used by the Plan in its other calculations may be
supplemented by several actuarial assumptions unique to withdrawal
liability.”).
• § 1393(a)(1)’s requirement that the selection of rates be reasonable “in the
aggregate” “gives actuaries some room to maneuver.”
• Other recent opinions have concluded that the rates need not be identical.
N.Y. Times v. Newspaper and Mail Deliverers’-Publishers’ Pension Fund, 303
F.Supp.3d 236 (S.D.N.Y. 2018); Manhattan Ford Lincoln, Inc. v. UAW Local 259
Pension Fund, 331 F.Supp.3d 365 (D.N.J. 2018), appeal voluntarily dismissed,
No. 18-2709, 2018 WL 10759131 (3d Cir. Oct. 9, 2018) (upholding use of
Segal Blend rate as opposed to rate used for minimum funding as
reasonable).On Judicial Review: Affirmed
• Were Arbitrator’s Conclusions Supported by Evidence?
Yes.
• Preliminarily, the court treated this question as one of fact
under 29 U.S.C. § 1401(c).
• “[T]he Court cannot conclude that [Company] has rebutted the
presumption that [Arbitrator’s] findings were correct,
“considering the evidence in the record, especially the fact that
[Company’s] own expert conceded that [Actuary’s] assumptions
were reasonable in light of industry standards.”
• Whether a selected discount rate reflects the “best estimate” of
the Plan’s “anticipated experience” under 29 U.S.C. §
1084(c)(3) is a procedural and not substantive question. I.e.,
inquires whether the “best estimate” is of the actuary and not
the plan’s trustees.
• Here, the discount rate was clearly chosen by Actuary.On Judicial Review: Affirmed
• Whether the Pension Plan is exempt from the 20-year
cap on withdrawal liability? Yes.
Court upheld ruling that the 1974 Pension Plan is a
“continuation of” the 1950 Plan
Employer was ineligible for the 20-year cap on
withdrawal liability payments under 29 U.S.C. §
1399(c)(1)(B)On Appeal – 4th Circuit • Appeal filed: June 24, 2020 • Briefs schedule: February – March 2021
Sofco Erectors, Inc. v. Trustees of
the Ohio, Operating Engineers
Pension FundActuarial Assumptions &
Withdrawal Liability Assessment
• Plan’s Actuary used the • Plan assessed Employer
Segal Blend rate (7.25% for both partial
to the extent vested withdrawal liability and
benefits are matched by complete withdrawal
market value of Plan’s liability
assets on hand; PBGC
interest rates to the • Total withdrawal liability
extent the vested benefits assessment of
are not matched by Plan’s $605,591.00
assets)
• Construction Industry
• Plan’s Actuary assumed a Employer
minimum funding rate of
7.25%.Dispute Proceeds to Arbitration
Employer’s Position
• Employer asserts that the withdrawal liability assessments were
unreasonable because Actuary used different rates for those
calculations and for the Plan’s minimum funding calculation
• Employer “adopts the reasoning” of New York Times v. Newspaper &
Mail Deliverers’-Publishers’ Pension Fund, 303 F.Supp.3d 236 (S.D.N.Y.
2018).
• Actuary used Segal Blend rate of 6.5% to calculate withdrawal liability,
but used a rate of 7.5% for calculating minimum funding requirements.
• Actuary testified that a 7.5% assumption was her “best estimate” of how
the fund’s assets will on average perform over the long term.
• Court stated if “If 7.5% was the Fund actuary’s ‘best estimate,’ it strains
reason to see how the Segal Blend, a 6.5% rate derived by blending that
7.5% ‘best estimate’ assumption with lower, no-risk PBGC bond rates, can
be accepted as the anticipated plan experience.”
• Court concluded Segal Blend was unreasonable and revised arbitrator’s
decision approving the fund’s use of itPension Plan’s Position
• Pension Fund argues Segal Blend has long been among
leading “schools of thought among actuaries with respect
to selection of [discount] rate assumptions”
• At Arbitration, Actuary testified:
• That funding interest rate was based on a “review of past
experience and future expectations” taking into account the
plan’s asset allocation and expected returns; and
• Segal Blend rate was his “best estimate calculation” of
anticipated experience under the PlanArbitrator’s Decision:
Pension Fund Prevails
• N.Y. Times “is not the only relevant authority.”
• Arbitrator notes that Manhattan Ford Lincoln, Inc. v. UAW Local
259 Pension Fund, 331 F.Supp.3d 365 (D.N.J. 2018) reached the
opposite conclusion of N.Y. Times, finding that differing rates
were permissible.
• Plan’s Actuary provided cognizable reasons for choosing
the Segal Blend rate:
• Accords with actuarial practice
• Accords with PBGC Op. Letter 86024
• “Balances risk with respect to future investment performance
to address unfunded vested benefit liability and the certainty
of current PBGC rates to address vested benefit liability
covered by the market value of assets on hand.”On Judicial Review: Reversed
• Was Actuary’s use of the Segal Blend rate, and not the rate used
for calculating minimum funding requirements, for purposes of
calculating complete withdrawal liability reasonable under 29
U.S.C. §§ 1391(a)(1) and 1401(a)(3)(B)? No.
• Arbitrator’s decision that the Segal Blend rate’s use was reasonable is
a “mixed question of fact and law and is reviewed for clear error.”
• Under § 1391(a)(1), the applicable rate must be the “best estimate of
the ‘anticipated experience’ under the plan.”
• In this case, Actuary testified that the 7.25% rate used to determine
funding levels was based upon a “‘review of past experience and future
expectations taking into account the plan’s asset allocation and
expected returns.”
• “Based on the applicable testimony, the Arbitrator erred in applying
the Segal Blend. Instead, Plaintiff has shown that the 7.25% rate is
mandated by ERISA.”
• Does ERISA prohibit a plan from using different rates for funding
and withdrawal liability? No.
• Here, there were legal grounds to find that “the Fund’s use of the Segal
Blend in this instance was erroneous,” to wit, that Actuary testified that
the 7.25% rate met the standards required by ERISA.On Judicial Review: Reversed
• Accompanying Issue of Successor Liability
• Plan correctly considered the contribution history of “Old Sofco”
when determining Sofco’s withdrawal liability, because Old Sofco
had the same name, operated in the same business, had some of
the same employees, had the same ID number on file with the Plan,
and Sofco failed to notify the Plan of any change in status at the
time Old Sofco went out of business.On Appeal – 6th Circuit • Appeal filed: June 24, 2020 • Oral Argument: January 29, 2021
Key Takeaways
• Actuarial Testimony
• Prime source of analogy/distinction between cases of this sort
• Can be decisive factor on whether a different discount rate is
“reasonable.”
• Nature of the Different Discount Rate
• Inquiry is not necessarily if the discount rate is based on Segal
Blend or PBGC rates, but why the different discount rate was
adopted
• Statutory Interpretation
• Second, Third, Fifth, Sixth, and Ninth Circuits each read 29 U.S.C. §
1084(c)(3) as imposing a “procedural” requirement rather than a
“substantive” requirement on the choice of discount rate. I.e., the
section is meant to restrict boards from unfairly choosing the
discount rate, not to impose additional legal requirements on an
actuary’s reasonable industry practices.Decisions - “Reasonable” Assumptions” for Withdrawal Liability “Reasonable” Actuarial Challenges to Actuarial Assumptions Affirmed Assumptions Upheld • United Mine Workers of • Sofco Erectors, Inc. v. Trustees America 1974 Pension Plan v. of Ohio, Operating Engineers Energy West Mining Co. (on Pension Fund (on appeal, 6th appeal, 4th Cir.) Cir.) • Manhattan Ford Lincoln, Inc. v. • New York Times v. Newspaper & UAW Local 259 Pension Fund Mail Deliverers’-Publishers’ • Miller & Son Paving, Inc. v. Pension Fund Teamsters Pension Trust Fund of • Nat’l Retirement Fund v. Metz Philadelphia, No. 15-4869, 2016 Culinary Mgmt (2nd Cir.) WL 4802752 (E.D. Penn. Sept. 14, 2016).
Cases 2nd Circuit • Nat’l Retirement Fund v. Metz Culinary Mgmt., 946 F.3d 146 (2d Cir. 2020). • New York Times v. Newspaper & Mail Deliverers’-Publishers’ Pension Fund, 303 F.Supp.3d 236 (S.D.N.Y. 2018). 3rd Circuit • Manhattan Ford Lincoln, Inc. v. UAW Local 259 Pension Fund, 331 F.Supp.3d 365 (D.N.J. 2018) , appeal voluntarily dismissed, No. 18-2709, 2018 WL 10759131 (3d Cir. Oct. 9, 2018) • Miller & Son Paving, Inc. v. Teamsters Pension Trust Fund of Philadelphia, No. 15-4869, 2016 WL 4802752 (E.D. Penn. Sept. 14, 2016). 4th Circuit • United Mine Workers of America 1974 Pension Plan v. Energy West Mining Co., 464 F.Supp.3d 104 (D.D.C. 2020), on appeal. 6th Circuit • Sofco Erectors, Inc. v. Trustees of the Ohio Operating Engineers Pension Fund, Case No. 2:19-CV-2238, 2020 WL 2541970 (S.D. Ohio May 19, 2020), on appeal.
Cases (2d Cir.)
• Nat’l Retirement Fund v. Metz Culinary Mgmt., 946 F.3d 146 (2d Cir.
2020).
• Concrete Pipe stands for the proposition that differing rate assumptions
for withdrawal liability and minimum funding purposes are not per se
unreasonable, but that the difference provides a “particularly great”
risk of manipulation and bias from a board of trustees.
• Accords with a “procedural” interpretation of the reasonability
requirements.
• Case concerned retroactivity of amended rate assumptions from7.25%
to 3.25%.
• 2nd Circuit reversed District Court, holding, for withdrawal lability
purposes must use interest rate assumptions in effect as of
Measurement Date
• New York Times v. Newspaper & Mail Deliverers’-Publishers’ Pension
Fund, 303 F.Supp.3d 236 (S.D.N.Y. 2018)
• Reads Concrete Pipe similarly to the Second Circuit in Metz.
• Disparity in rates is not “at all times, impermissible by law.”
• However, different discount rate is not permissible where actuary has
stipulated that the minimum funding rate offers the “best estimate of
anticipated experience under the plan” and the discount rate was used
“regardless of the particular…plan’s actual portfolio of assets.”District Court Cases (3d Cir.)
• Manhattan Ford Lincoln, Inc. v. UAW Local 259 Pension Fund,
331 F.Supp.3d 365 (D.N.J. 2018) appeal voluntarily dismissed,
No. 18-2709, 2018 WL 10759131 (3d Cir. Oct. 9, 2018)
• Identical rates are not required because “[t]he context of
withdrawal liability differs from that of funding in ways that do
justify, or at least may permissibly justify, a different approach.”
Additionally, legislative history and Concrete Pipe indicate that
differing rates are permissible.
• Whether the rate disparity is justified may “raise a factual
question.”
• Miller & Son Paving, Inc. v. Teamsters Pension Trust Fund of
Philadelphia, No. 15-4869, 2016 WL 4802752 (E.D. Penn.
Sept. 14, 2016)
• Use of disparate rates to calculate minimum funding and
withdrawal liability was permissible as a matter of plan
interpretation.You can also read
