The last several weeks have brought big news for employers that contribute to multiemployer pensions – some good and some not-so-good. The not-so-good: the Pension Benefit Guaranty Corporation has issued a proposed regulation on permissible actuarial assumptions to be used in withdrawal liability calculations that would allow multiemployer plan actuaries to use much lower interest rates than courts have recently allowed. If that regulation is finalized more or less “as-is,” it will in many cases significantly increase the cost of withdrawing from a multiemployer plan. The good: the Ninth Circuit Court of Appeals ruled in favor of a withdrawing employer on this issue, rejecting the application of the terms of the proposed regulation to the withdrawal transaction under consideration.
In this article, we’ll consider what these developments mean for four types of readers: (1) employers that have recently withdrawn from multiemployer pension plans (2) employers that currently contribute to multiemployer pension plans; (3) companies that often acquire employers that fall into group (1) or (2): and (4) advisors to employers/companies in group (1), (2), or (3).
In 1980, Congress passed and President Carter signed into law the Multiemployer Pension Plan Amendments Act (MPPAA). MPPAA (among other things) included certain protections for workers’ pensions under collectively bargained multiemployer plans (sometimes called “Taft-Hartley” plans) and rules ensuring that employers exiting those plans pay their fair share of the unfunded vested benefits as a “withdrawal liability.”
Since its adoption, and particularly in the last 10 years or so, there has been a developing controversy under MPPAA as to how – for purposes of calculating a withdrawing employer’s withdrawal liability – a plan’s unfunded vested benefit benefit liability (UVBs) should be determined. Critically, what interest/discount rate should be used to determine the amount of those liabilities. Differences in the plan’s valuation interest rate assumption may result in extremely significant changes in the amount of UVBs and thus the amount of the withdrawing employer’s withdrawal liability.
Current statutory rule
ERISA section 4213 states that withdrawal liability shall be determined based on:
(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, or
(2) actuarial assumptions and methods set forth in the [PBGC’s] regulations for purposes of determining an employer’s withdrawal liability.
Thus far, the PBGC has not published final regulations under clause (2) (above), and controversy over what interest rate to use has been resolved by courts interpreting clause (1). But, last month, PBGC finally and after 42 years proposed a regulation under clause (2).
Different valuation interest/discount rates and why they matter
Typically, in cases in which withdrawing employers dispute the valuation interest rate used by the plan, there are one or more of the following rates “in play:”
The plan funding rate. Unlike single employer plans, multiemployer plans are for funding purposes required to value plan liabilities based on an expected return on plan assets, typically resulting in a higher valuation rate than is used for single employer plans. Many plans use a rate between 7%-7.5%.
PBGC rates. PBGC publishes rates to be used to (among other things) in single employer plan distress terminations and in multiemployer plan “mass withdrawals.” These rates have been quite low recently – between 1.5% and 2.5% during 2021 – but have risen much like other rates more recently to around 3.75% right now.
The “Segal Blend.” In many cases, the plan will value liabilities for purposes of calculating an employer’s withdrawal liability based on what we think of as an effective interest rate that is developed from a blend of the funding rate and the PBGC rates, called the “Segal Blend.” (Technically, the “Segal Blend” is a blend of liability determinations, not a blend of rates, but it has a similar effect.) Under this approach, funded liabilities are valued using PBGC rates and unfunded liabilities are valued using the plan funding rate.
Higher rates = lower liabilities = lower withdrawal liabilities. So, withdrawing employers generally prefer a calculation using the (higher) plan funding rate, and plans/plan trustees often prefer the (lower) PBGC rates or the Segal Blend. (Note that there have been times when using the PBGC rates or the Segal Blend produced lower withdrawal liabilities than using the funding interest rate, but that has rarely, if ever, been the case in recent years.)
PBGC Proposed Regulations
In mid-October, PBGC (as we noted) proposed regulations specifying actuarial assumptions for calculating withdrawal liability (as provided under clause (2) above). Paraphrasing and oversimplifying, the proposed regulation provides that the actuarial assumptions other than the valuation interest/discount rate used to determine withdrawal liability must be reasonable and, in combination, offer the actuary’s best estimate of anticipated experience under the plan. For the interest/discount rate assumption, however, the actuary may use any rate in the range from the plan funding rate to PBGC rates, even if, e.g., using PBGC rates would render the assumptions to be “unreasonable” in the aggregate.
In the Preamble to the proposed regulation, PBGC noted that there have been a number of disputes over the assessment of withdrawal liability and that several of those cases have noted that PBGC had not used its statutory authority to issue a regulation. Further, the Preamble implies that the outcome of reducing the number of disputes by writing the regulation would be a desirable outcome.
During the week after the proposed regulation was issued, the Conference of Consulting Actuaries held its Annual Meeting. At a session entitled “Dealer’s Choice: PBGC on Current Topics,” PBGC representatives reiterated that reducing disputes was at least part of the motivation for proposing the regulation. In addition, one PBGC representative said that PBGC would be interested in comments on whether the interest range was too wide and should in some way be made narrower. Specifically, they asked if the range of permissible rates should extend from PBGC rates to a rate somewhat less than the funding interest rate.
Ninth Circuit decision in GCIU – Employer Retirement Fund; Board of Trustees of the GCIU – Employer Retirement Fund v MNG Enterprises, Inc.
After PBGC proposed its regulation, on October 28, 2022, the Ninth Circuit Court of Appeals ruled in GCIU – Employer Retirement Fund; Board of Trustees of the GCIU – Employer Retirement Fund v MNG Enterprises, Inc. In this case, the employer (MNG) had withdrawn from the GCIU plan, and the plan had assessed withdrawal liability based on PBGC rates. MNG challenged that assessment.
The Court ruled in favor of MNG in spite of the proposed regulation (which as it currently stands would have allowed the use of PBGC rates), saying:
That proposed regulation does not help GCIU [the plan] here. While the regulation, if enacted, would permit plans to use the PBGC rate when calculating withdrawal liability, the regulation expressly invokes the PBGC’s authority under [clause (2) above] when doing so. Here, by contrast, GCIU must justify its actuary’s assumptions under [clause (1) above] which, as indicated by the disjunctive “or” in that provision, is a separate path with separate requirements. The PBGC’s proposed regulation, therefore, has no bearing on the question presented here; nor do we express any view on the validity of the proposed regulation.
This is the third recent case in which Appeals Courts have ruled in favor of withdrawing employers where the plan’s actuary used a valuation interest rate for calculating withdrawal liability that was very different from the rate used for minimum funding. In Sofco Erectors, Inc. v. Trustees of the Ohio Operating Engineers Pension Fund, the Sixth Circuit ruled that the use of the Segal Blend violated ERISA. In United Mine Workers of America 1974 Pension Plan v. Energy West Mining Company, the DC Circuit found that the use of PBGC rates violated ERISA. In both cases, the courts noted that neither the plans (nor their actuaries) established that PBGC rates were reflective of anticipated future experience under the plan.
Significance of ERISA minimum funding language
In these cases, in finding that the “right” valuation interest rate is the plan funding rate, courts have found it persuasive that ERISA minimum funding standards for multiemployer plans include language paralleling clause (1) (above). Quoting that (minimum funding calculation) language:
[A]ll costs, liabilities, rates of interest, and other factors under the plan shall be determined on the basis of actuarial assumptions and methods –
each of which is 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.
What Does This Mean for Employers?
It’s difficult to say exactly what all this means for employers that did, currently do, or might in the future be contributing employers to multiemployer pension plans. If we can use the proposed regulation as an indicator, PBGC intends to allow plans and their actuaries to dissociate their valuation interest/discount rate assumptions for withdrawal liability calculations from those for minimum funding, despite the very distinct similarity in statutory language. The courts, on the other hand, view that similarity as a basis for disallowing the use of a different rate for calculating withdrawal liability.
As a contributing employer, why should you care?
That’s a great question. Let’s illustrate with a purely hypothetical, but not unrealistic, example.
|Interest Rate Basis||Funding = 7.5%||Plan Termination = 3.75%|
|Vested Benefit Liability||$1,000,000,000||$1,700,000,000|
This example, while realistic, might be extreme in its leverage, but it does serve to illustrate a point. Withdrawal liability assessments can be very highly leveraged. When the actuary’s interest rate assumption changes, the value of assets does not change, but the value of the liabilities does. In the example above, a 70% increase in liabilities would result in withdrawal liability increasing eight-fold. What this also shows is that an employer considering withdrawing from a multiemployer plan should not get a sense of comfort simply because the plan has been certified as being in the so-called “green zone.”
Employers that Have Recently Withdrawn from Multiemployer Plans
Employers that have recently withdrawn from multiemployer pension plans and have not yet been assessed a withdrawal liability (but expect to be assessed) should be wary and look carefully at the assessment calculations the plan provides. What interest rate was used? Was it something like the PBGC rate of the Segal Blend? If you’re in doubt, October Three or your ERISA or Labor and Employment attorney might be able to help. If you wish to challenge the assessment of withdrawal liability, that process generally must begin with 90 days of the date of notification.
Employers that have already received an assessment have a more significant challenge. The 90-day clock is already ticking and might have expired. Consult with counsel to assess your options.
Currently Contributing Employers
Employers that currently contribute to multiemployer plans might have considered the possibility of withdrawing at some point in the future. We can’t be certain how the whole web of litigation and PBGC regulation will play out. In any event, the court situation is currently favorable for withdrawing employers, but the regulatory position of PBGC is not. Be sure that you understand this evolving situation before making any decisions.
Some companies, including many private equity firms, often acquire companies that contribute to multiemployer plans. The potential withdrawal liability in multiemployer pensions is often an important factor in evaluating target company value and in deal negotiations.
If the recent outcomes of litigation are the determining factor, then withdrawal liability calculations might be performed using assumptions generally consistent with plan funding. If PBGC’s proposed regulation is finalized more or less as-is, and courts eventually give deference to that regulation, many multiemployer plan actuaries will use interest rates that are the same as or much closer to PBGC rates than they are to funding interest rates. This, of course, will vary from plan to plan and actuary to actuary, but acquirers should be prepared for the possibility.
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We will continue to follow this issue. In the meantime, if you need assistance in understanding how all of these recent events might affect you, please contact your October Three consultant for help.