Just last month, in a rare win for a withdrawing employer, a federal judge in the Southern District of Ohio granted summary judgment to the employer, Sofco Erectors, Inc., in its dispute over withdrawal liability with the Trustees of the Ohio Operating Engineers Pension Fund. In his opinion, Judge Algenon L. Marbley cited the 2018 ruling in New York Times Co. v. Mail Deliverers’-Publishers’ Pension Fund in which the employer also won.
When an employer withdraws from a multiemployer pension fund, under the Multiemployer Pension Plan Amendments Act of 1980 (MPPAA), the fund is to assess the withdrawing employer a withdrawal liability representing that employer’s share of the unfunded vested benefit (UVB) liability in the plan.
ERISA provides complex rules explaining how the fund’s Enrolled Actuary should determine that withdrawal liability. The UVB is an actuarially discounted present value. That means that the actuary must make a set of assumptions to perform the calculations. Usually, the actuary uses the same assumptions as he uses in determining funding levels for the plan, with the possible exception of a different discount rate . Notably, in this case, the actuary used (and has used for at least the last 10 years) a 7.25% discount rate when performing funding calculations for the plan, but a lower blended rate known as the Segal Blend to determine UVB for withdrawal liability purposes.
Decision by the arbitrator reversed by the district court
The withdrawn employer challenged the actuary’s use of the Segal Blend. In this situation, the employer must, before going to court, first submit its challenge to arbitration of the assessment.
Both Sofco and the fund sought summary judgment from the arbitrator. When a party moves for summary judgment, the finder of fact, in this case, the arbitrator, should grant summary judgment only if there is no genuine dispute as to any material fact and that the moving party is entitled to judgment as a matter of law. Here, the arbitrator denied Sofco’s motion for summary judgment and instead granted summary judgment to the fund.
Sofco appealed this decision to the Federal District Court for the Southern District of Ohio. In that district court proceeding, the fund argued for its use of the Segal Blend in saying that it has long been among the leading “schools of thought among actuaries with respect to the selection of [discount] rate assumptions.”
The Court was not persuaded and (reversing the arbitrator’s decision) granted summary judgment in favor of Sofco.
Calculating withdrawal liability
ERISA requires that the actuarial assumptions and methods used to calculate an employer’s withdrawal liability must in the aggregate 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.
The Court found the use of the Segal Blend violated this standard. Judge Marbley while recognizing that it is not unlawful to use different discount rates for funding and withdrawal liability (citing the 1993 US Supreme Court decision in Concrete Pipe ), “there are legal grounds to find that the fund’s use of the Segal Blend in this instance was erroneous.” He ordered that the withdrawal liability be recalculated using the same 7.25% discount rate that the plan used for funding calculations.
Since the opinion of the Court does not to us go through all of Judge Marbley’s thought process in rejecting the use of the Segal Blend, we can only guess what caused him to grant summary judgment in favor of the withdrawn employer. The most common challenges that we have seen have been on either of two bases – that the Segal Blend is not a rate, but a blend of multiple rates; or that the disparity between the liabilities determined for funding and for withdrawal liability are so disparate as to render one unreasonable.
Takeaways for employers
Despite this second significant verdict in their favor, employers considering withdrawal should not assume that they will necessarily receive the same treatment when challenging the use of the Segal Blend. Most challenges to the Segal Blend have not been successful at arbitration or when appealed to federal courts.
Employers who have withdrawn from a multiemployer pension fund that has assessed a withdrawal liability using the Segal Blend or some other discount rate assumption that varies from that used for funding and who do want to consider challenging that liability should consider:
Getting an analysis from an actuary independent from the fund of what the difference in withdrawal liability would have been had the fund used the same discount rate it does for funding calculations.
Determining whether that difference is sufficient to justify the cost and effort of pursuing arbitration and a possible court battle.