Withdrawal liability discount rates – two courts, two different views

In this article we discuss the ERISA framework for determining withdrawal liability and the valuation discount rate used to do so and for any employer challenge of the plan’s and the plan actuary’s determinations in that regard.

Some employers provide retirement benefits for many of their employees through one or more multiemployer (“Taft-Hartley”) plans, and that benefit format represents, in effect, a strategic “fact of life” for them. But there is also a (larger) group of employers that maintain their own (“single employer”) retirement savings plan for the vast majority of their employees but who nevertheless make contributions to one or more multiemployer plans for certain discrete groups of unionized employees.

The possibility of having to pay multiemployer plan withdrawal liability, after a plant shutdown or reduction in force or even a change in union representation, is an issue for both sorts of employer. And often a key determinant of the size of an employer’s withdrawal liability will be the discount rate used by the plan’s actuary to value plan liabilities.

In two recent cases, New York Times v. Newspaper and Mail Deliverers’-Publishers’ Pension Fund (decided March 26, 2018) and Manhattan Ford v. UAW Local 259 Pension Fund (decided July 3, 2018), two federal district courts reached different conclusions about whether a plan actuary may, in calculating an employer’s withdrawal liability, use a lower liability valuation discount rate than the rate used to value liabilities for purposes of plan funding.

In this article we discuss the ERISA framework for determining withdrawal liability and the valuation discount rate used to do so and for any employer challenge of the plan’s and the plan actuary’s determinations in that regard. In separate articles, we discuss the Manhattan Ford and New York Times cases in more detail.

The key disputed fact: the valuation discount rate

While there may be other disputed issues that arise in connection with multi-employer plan withdrawals, the “money” issue is generally the amount of withdrawal liability. And in that regard, the key factor determining its size is typically the rate used to discount liabilities for purposes of determining the unfunded vested benefit liability.

InManhattan Ford v. UAW Local 259 Pension Fund, for instance, the plan determined, based on the “Segal Blend” discount rate (discussed further below), that the employer’s withdrawal liability was $2.55 million. If the plan had used the rate the employer was proposing (the plan’s liability valuation rate for plan funding), the withdrawal liability would have been $0.

Assessment of liability, arbitration and court review

Under ERISA, as amended by the Multi-employer Pension Plan Amendment Act of 1980 (“MPPAA”), determinations and disputes of withdrawal liability follow a four-step process:

In the first instance, the employer’s withdrawal liability is determined by the plan.

The employer may ask the plan to review any specific matters/determinations and possible inaccuracies and furnish any additional information.

If a dispute remains, either the plan or the employer may initiate arbitration.

Upon completion of arbitration, either party may bring an action in federal court to vacate or modify the arbitrator’s award.


In this process, two rules apply that, in effect, favor the determinations made by the plan:

An employer contesting the plan’s determination of withdrawal liability must show by a preponderance of the evidence that the determination was unreasonable or clearly erroneous.

The determination of a plan’s unfunded vested benefits is presumed correct unless contesting party shows by a preponderance of evidence that either: (i) the actuarial assumptions and methods used in the determination were, in the aggregate, unreasonable; or (ii) the plan’s actuary made a significant error in applying the actuarial assumptions or methods.

It is, however, possible to overcome these provisions favoring the plan.

Alternative liability valuation rates: the plan funding rate, PBGC rates and the Segal Blend

In challenges to withdrawal liability determinations, three alternative liability valuation rates are often considered.

The plan funding rate. In the withdrawal liability valuation rate disputes in New York Times_and _Manhattan Ford, the employer argued that the plan and the plan’s actuary violated the MPPA rules by using (for the withdrawal liability determination) a liability valuation rate that was lower than the rate used for plan funding. Unlike single employer plans, multiemployer plans are for funding purposes permitted to value plan liabilities based on an expected return on plan assets. In both New York Times and Manhattan Ford, that funding rate was 7.5%.

PBGC rates. The Pension Benefit Guaranty Corporation publishes rates to be used to (among other things) in single employer plan terminations and are (quoting one of the plan’s experts in Manhattan Ford) “a proxy for annuitization rates in the commercial marketplace.” In Manhattan Ford, the PBGC interest rates used were a 3% rate for liabilities due to benefits expected to be paid in the first 20 years and 3.31% for liabilities beyond 20 years.

The Segal Blend. In both these cases, the plan valued liabilities for purposes of calculating the employer’s withdrawal liability based on a blend of the funding rate and the PBGC rates, called the “Segal Blend.” Under this approach, funded liabilities are valued using PBGC rates and unfunded liabilities are valued using the plan funding rate. In New York Times, using this blended approach produced an “intermediate” valuation rate of approximately 6.5%.

To emphasize why the rate matters: the lower the valuation rate, the greater the present value of plan liabilities, where greater plan liabilities will generally generate a greater withdrawal liability.

Arguments made by employers

In these cases, employers disputing the plan’s withdrawal liability determination argued that the plan’s actuary is required, as a matter of law, to value liabilities for purposes of calculating withdrawal liability based on the plan funding rate.

The arguments by the parties and the analysis by the courts of this issue generally involve detailed discussions of: (1) The terms of the statute, which currently provides a slightly different standard for actuarial assumptions for funding (each of which must be reasonable) and actuarial assumptions for withdrawal liability calculation (which must be reasonable “in the aggregate”). And (2) the Supreme Court’s decision Concrete Pipe & Prod. of Cal., Inc. v. Constr. Laborers Pension Tr. for S. Cal. (1993), which considered some of these issues, albeit with respect to a prior (and different) version of ERISA funding rules.

Differing rulings on the same basic issue

The courts in New York Times and Manhattan Ford came to different conclusions on this issue. In New York Times, the court found that, on the record, “the actuary’s testimony, combined with the untethered composition of the Segal Blend and paucity of analysis by the Arbitrator, create ‘a definite and firm conviction that a mistake has been made’ in accepting the Segal Blend.”

In Manhattan Ford, the court was persuaded by the plan actuary’s argument that it was appropriate to apply a “risk-transfer” rather than an “ongoing funding” valuation methodology in determining withdrawal liability. The court found that this approach “recognize[d] a more complicated reality than the one embodied in minimum funding levels. The Arbitrator did not have to accept those alternative models, and a different arbitrator could have decided the case differently. This Arbitrator, however, did not clearly err in accepting the risk-transfer theory and settlement-based concept behind the Segal Blend.”

We provide a detailed discussion of Manhattan Ford in our related article.

Takeaways for employers

Many employers will have multi-employer plan exposure (e.g., with respect to certain collective bargaining units), even if a multi-employer plan is not the employer’s principle retirement benefits program. And a variety of events, planned and unplanned, may trigger assessment of employer withdrawal liability with respect to one of these plans.

The valuation interest rate used to value liabilities may be the most important factor in determining the amount of the employer’s withdrawal liability, or whether the employer owes any withdrawal liability at all.

The Segal Blend is by no means the only valuation interest rate used by multiemployer plans to calculate withdrawal liability. Some plans will use the plan funding rate. Some will only use the PBGC rate.

In reviewing the economics of a multi-employer plan withdrawal, an employer will want to consider the plan’s withdrawal liability valuation policy. But it should be understood that there is (generally) nothing preventing the plan from changing that policy.

Even though there are a number of procedural rules applicable to the review of a plan’s determination of withdrawal liability that favor the plan, the result in New York Times is evidence that an employer can win a withdrawal liability dispute.