Court Rejects Segal Blend for Withdrawal Liability Calculations
Last week, there was good news for withdrawing employers from multiemployer pension plans. In The New York Times Company v Newspaper and Mail Deliverers’ – Publishers’ Pension Fund, Judge Robert W. Sweet in the Southern District of New York issued what to us is a fairly stunning decision, but one that we tend to support. In a nutshell, the court found that the plan’s Trustees and Enrolled Actuary do not have complete discretion in their choice of an appropriate discount rate in determining withdrawal liability for employers that significantly reduce or entirely cease contributing to a multiemployer plan.
The New York Times (NYT) has been a participating employer in this plan since 1981. Due to a series of events including workforce reductions, NYT’s contributions to the plan had declined significantly in recent years. The Trustees for the Fund determined that this reduction constituted a partial withdrawal and assessed NYT with an assessment for partial withdrawal liability. As is permitted by ERISA, NYT timely filed for arbitration claiming
The determination by the Fund that there had been a partial withdrawal was incorrect;
The use of the “Segal Blend” method of determining the interest rate to be used for purposes of determining NYT’s withdrawal liability is incorrect;
The determination of partial withdrawal liability in the case of successive partial withdrawals was incorrect; and
The interest provided on NYT’s overpayment of withdrawal liability to the Fund was insufficient.
The court ruled on all four points, the first and fourth in favor of the Fund and the third in favor of NYT, but to us as actuaries who have testified for withdrawing employers on similar matters, the key ruling was in favor of NYT on the second issue. That is, the court reversed the arbitrator’s ruling approving the Segal Blend.
In the remainder of this article, we’ll focus on that reversal. We’ll give some brief background on withdrawal liability, describe the Segal Blend and other methods sometimes used by Funds and their actuaries that have the potential to be affected by this ruling, discuss why as we understand it that the judge ruled on this issue the way he did, what this could mean for other employers withdrawing from multiemployer funds, and how October Three can help.
Withdrawal Liability, Generally
The concept of withdrawal liability was added to ERISA by the Multiemployer Pension Plan Amendments Act of 1980. Generally speaking, its purpose is to ensure that participating sponsors who either significantly cut back their contributions to a multiemployer plan or cease those contributions entirely will pay their fair share of any unfunded vested benefits (UVB). That amount is determined as the excess, if any, of the Fund’s vested benefit liability over the Fund’s assets. But, as we have all come to know, the liability of the Fund can be determined in many ways with the key differences coming from different actuarial assumptions.
The most critical of those assumptions is the interest rate. In fact, using a risk-free “spot” interest rate as compared to a long-term rate based on a blend of risky assets and safe assets can result in an otherwise well-funded plan looking severely underfunded. Or said differently, that single change in actuarial assumptions can be the difference in a withdrawing employer having no withdrawal liability and that same employer having to make withdrawal liability payments for up to 20 years in excess of the amounts it already contributed to the Fund. Somewhere between that long-term rate and the risk-free rate lies the Segal Blend.
Segal Blend
The Segal Blend considers that benefits that are funded are more likely to be paid out than benefits that are not. In other words, to the extent that such benefits have matching assets, they might be viewed as being relatively risk-free while those benefits that are not yet funded could be considered risky. So, the Segal Blend uses the rates established by the Pension Benefit Guaranty Corporation (PBGC) for so-called mass withdrawals for funded benefits and the rate used by the Fund’s actuary (a long-term rate) for the currently unfunded benefits. Whether the Segal Blend is appropriate is a matter of opinion, but arbitrators and courts have frequently upheld the interest rate assumption used by the actuary, including the Segal Blend. We’ll discuss the statutory requirements for the assumptions later.
Other Interest Rate Assumptions Used to Determine Withdrawal Liability
The Segal Blend has become a very popular method used by Funds and their actuaries to determine withdrawal liability for one simple reason – Segal is the largest provider of actuarial services to multiemployer plans. In our experience, where the Segal Blend is not used, Funds and their actuaries tend to use either of two other interest rate assumptions to determine withdrawal liability.
The first and simplest of those assumptions is to simply use the funding interest rate; that is, the rate that the Fund’s actuary uses for most of the funding calculations for the Fund. When combined with the other assumptions chosen by the actuary, they are to be reasonable taking into account the experience of the plan and reasonable expectations and, in combination, offer the actuary’s best estimate of anticipated experience under the plan. Generally, that rate is expected to reflect the expected rate of return on plan assets.
The somewhat more complex assumption that we see used quite commonly is the interest rate that would be used for purposes of determining the benefit liabilities of the Fund in the event of a mass withdrawal. These rates are published monthly by the PBGC and are intended to represent the rates at which those obligations could be settled on the high-grade annuity market. In recent years, use of those rates has become far more prevalent in the calculation of withdrawal liability and have often been upheld by arbitrators and courts.
The Judge’s Ruling
Judge Sweet conceded that the Segal Blend has been pretty broadly accepted by both arbitrators and courts, but focused on this case specifically. He noted that the statutory language in ERISA that distinguishes between funding assumptions and withdrawal liability assumptions only in that funding assumptions have the added requirement of being individually reasonable while withdrawal liability assumptions need only be reasonable in the aggregate. He went on to discuss the arguments of both sides in great detail.
Convincing to us, however, was wording in the opinion that “the actuary’s testimony [that she used the Segal Blend as her “best estimate” without considering the plan’s actual investments], 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;.” This reasoning seems to have placed the burden of proof on the Fund and its actuary to justify the difference in assumptions where the statutory language is so similar while other jurisdictions have tended to place the burden on the withdrawing employer to demonstrate that the withdrawal liability assumptions failed to be reasonable in the aggregate.
Implications
This ruling, while many differ from it, appears positive for withdrawing employers. While the case comes from the Southern District of New York, it provides a combined legal and actuarial theory that at least one court has found compelling. We would expect that other withdrawing employers will be likely to use similar legal and actuarial reasoning in challenging both the Segal Blend and the use of other rates different from the funding rate.
October Three’s Role
October Three’s actuaries have prepared a number of expert reports and testified at arbitration in matters of this type. In fact, theories that we have espoused in currently undecided cases use some of the same logic cited by the judge in this case.
As actuaries with strong knowledge in this area and significant testifying experience who do not serve as multiemployer fund actuaries, we are able to approach such situations without the bias of representing funds and the need to potentially support what we might have done in other possibly conflicting situations.