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Earlier this month, a 2nd Circuit Court of Appeals decision in The National Retirement Fund, et al. v. Metz Culinary Management, Inc. gave new hope to plan sponsors withdrawing from multiemployer pension plans that the cost of withdrawing may be closer to the amounts they expected when they made the decision to withdraw. In vacating the lower court’s decision, the 2nd Circuit chose to eliminate the leeway that actuaries to multiemployer trusts were considered to have in changing the interest rate retroactively after the last measurement date used to determine withdrawal liability owed by contributing employers that withdraw from those plans.
Background
A multiemployer pension plan is a defined benefit plan under which unions bargain for the level of contributions to be made (often in cents per hour worked) on behalf of an employee rather than for the amount of benefits. A Board of Trustees composed of representatives from both the union(s) and management then determine the level of benefits that those contributions are able to support. As a means of stopping employers from leaving poorly funded plans without paying for their share of the unfunded liability, ERISA provides for a plan to assess a withdrawal liability on such employers. It is the determination of that withdrawal liability that is the main subject of this case (and many others).
In formulating the withdrawal liability structure, Congress sought to protect the remaining employers in a plan and to stop abusive practices by withdrawing employers. In a nutshell, a withdrawing employer is charged for its share of the unfunded vested benefit (UVB) liability. That share is based, roughly speaking, on the share of contributions made to the plan by the employer as compared to those made by all contributing employers.
It’s the calculation of that UVB that was at issue in this case.
Calculating the UVB
ERISA provides for several methods of calculating the UVB in a multiemployer plan. Underlying each such calculation are the actuarial assumptions used to determine the vested benefit liability – the amount that is compared to plan assets to determine the UVB. While the plan’s Enrolled Actuary (EA) selects a number of assumptions in order to make that calculation (rates of mortality, ages at which participants cease working and or retire, rates of disability, percentage married), the assumption that in many cases, including Metz, results in the greatest variation in UVB is the interest rate – the rate at which benefits expected to be paid in the future are discounted.
What is the Interest Rate?
ERISA provides for two distinct sets of assumptions to be used in multiemployer plan calculations – one for the annual minimum funding actuarial valuation of the plan and the other for determining withdrawal liability. The similarities and differences in those assumptions have been the root cause of a large percentage of disputes about withdrawal liability. When signing Schedule MB to Form 5500, the Enrolled Actuary asserts:
“[E]ach prescribed assumption was applied in accordance with applicable law and regulations. In my opinion, each other assumption is reasonable (taking into account the experience of the plan and reasonable expectations) and such other assumptions, in combination, offer my best estimate of anticipated experience under the plan.”
Guidance for the determination of withdrawal liability tells us that the Enrolled Actuary must use:
“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, or actuarial assumptions and methods set forth in the [PBGC’s] regulations for purposes of determining withdrawal liability.”
Because PBGC has not issued such regulations, the Enrolled Actuary (EA) is left with the first basis.
Note that the language is strikingly similar, but not identical. It’s the question of the amount of latitude that the EA has that led to this as well as many other disputes.
The Facts of the Metz Case
The EA for the National Retirement Fund (NRF) had been employed by a large actuarial firm. For the 2013 actuarial valuation as well as for several years prior, that EA had performed the funding valuation using an interest rate of 7.25%. In late 2013, the NRF made the decision to change actuarial firms for the 2014 plan year to another actuarial firm. Through 2013, the first firm had used that same 7.25% interest rate in determining withdrawal liability. Metz withdrew from the NRF in 2014. Also in mid-2014, the new actuary informed the Trustees that it had changed that rate to PBGC rates used to determine the liabilities of a terminating plan resulting in an interest rate of approximately 3.25% for the calculation for Metz. That change in interest rate (other actuarial assumptions were left unchanged) increased Metz’s assessed withdrawal liability from roughly to $255,000 as awarded by the arbitrator to about $998,000 as awarded by the District Court. Metz challenged that determination on the basis that because ERISA requires a fund to determine withdrawal liability as of the end of the year before withdrawal, the withdrawal liability should have reflected an interest rate of 7.5% – the rate in effect at that time under the prior actuary.
That change in interest rate (other actuarial assumptions were left unchanged) increased Metz’s assessed withdrawal liability from roughly to $255,000 as awarded by the arbitrator to about $998,000 as awarded by the District Court. Metz challenged that determination on the basis that because ERISA requires a fund to determine withdrawal liability as of the end of the year before withdrawal, the withdrawal liability should have reflected an interest rate of 7.5% – the rate in effect at that time under the prior actuary.
The District Court had found that:
“the withdrawal liability interest rate assumption in effect on the Measurement Date is not applicable to the upcoming plan year unless the actuary affirmatively determines that the assumption . . . is reasonable and her best estimate of anticipated experience under the plan as of the Measurement Date.”
The 2nd Circuit noted that interest rate assumptions “must have a degree of stability.” Perhaps stronger, the Court said that:
“certain provisions of ERISA allow employers to request and receive notice of their estimated withdrawal liability prior to actually withdrawing from a fund… Such provisions are of no value[emphasis added] if retroactive changes in interest rates assumptions may be made at any time.”
The 2nd Circuit remanded to the District Court to enter judgment for Metz and to leave remaining issues to the arbitrator.
What Should Withdrawing Employers Do?
The path for employers withdrawing from multiemployer pension plans in the future remains murky. In more cases than not, arbitrators have given significant leeway to the EA in choosing assumptions. Metz may, however, give such employers another basis on which to challenge what they believe to be unfair assumptions.