6th Cir. Opens Door to Wave of Pension Plan Exit Liability Suits

A U.S. Court of Appeals for the Sixth Circuit ruling this week rejecting a controversial method of calculating pension withdrawal liability could embolden employers strapped with hefty exit fees to sue for relief.

The decision Tuesday marked the first time a federal appeals panel has ruled against multiemployer pension plans’ use of the Segal Blend, a funding analysis that mixes in a different interest rate than is utilized for other plan purposes, often resulting in greater liability for the exiting employer.

An employer that partly or completely exits a multiemployer plan can be charged millions of dollars in fees, or almost nothing, depending on the method the plan’s actuary uses to calculate withdrawal liability. The fee covers the employer’s share of benefits that aren’t completely funded under the plan, and the market interest on that contribution is a major point of contention among industry leaders.

Lower interest rates usually mean employers have more liability at withdrawal, because the money they have contributed or will contribute isn’t expected to grow as much. The Segal Blend, which combines low-interest annuity rates set by the government with the plan’s much higher anticipated market returns, can significantly increase an employer’s estimated share of unfunded vested benefits, especially in today’s low-interest rate environment.

From employers’ perspective, the controversy over multiemployer plans’ use of the Segal Blend has been compounded by the legal landscape: Only a handful of federal courts have weighed in on the merits of the Segal method, and many of those cases were settled, leaving relevant case law sparse and scattered. Challenging an actuary’s calculation can be expensive and time consuming for companies, and often yields mixed results. The burden to prove the analysis is unreasonable or erroneous lies with the employer, and cases typically are first decided by an arbitrator.

But the Sixth Circuit decision drew a clear line on the issue by holding that the Segal Blend violates the Employee Retirement Income Security Act. That gives employers a reason to take the risk of mounting a challenge, practitioners say.

“Arguably, this ruling provides good grounds for more and more employers to challenge assessments,” said Michael McNally, a partner at Fox Rothschild LLP in Minneapolis. “Oftentimes, cases can result in really big swings in the liability, so there’s certainly good grounds and ample reason given the result.”

‘Beauty of a Blend’

The Segal Blend, a proprietary product of Segal Group Inc., has been a fixture in the relationship between union pension plans and businesses exiting them since the advent of withdrawal liability in the early 1980s.

Short-term market rates the Pension Benefit Guaranty Corporation uses to calculate mass withdrawal liability were higher back then, so the Segal Blend’s incorporation of those rates yielded lower withdrawal liability amounts.

After the 2008-09 market crash, those rates plummeted and plans invested in equities lost big, meaning employers had more reasons to leave plans but would get slapped with bigger fees if they did.

Still, sometimes the blend may be appropriate based on the plan’s funding status, McNally said. PBGC short-term rates are used when a plan has a mass withdrawal event and is pouring assets into annuities, and using a blend to reflect that reality may better grasp the nature of the fund.

“The beauty of a blend is that if plans are meant to be long-term, it reflects their long-term nature,” said Michael Clark, managing director and consulting actuary at River and Mercantile Group PLC, a U.S. financial consulting firm.

‘Anticipated Experience’

The Sixth Circuit said in its ruling that trustees of an Ohio operating engineers fund couldn’t rely on the blend to assess more than $800,000 in withdrawal liability against Sofco Erectors Inc., because ERISA requires that the interest rate used for those calculations be based on the “anticipated experience under the plan.”

“An actuary using the Segal Blend is factoring in an interest rate used for plans that essentially go out of business, even though these plans are neither going out of business nor required to purchase annuities to cover the departing employer’s share of vested benefits,” the court said.

The Second Circuit heard arguments last year in a similar case involving The New York Times, but the parties settled before the court could rule. District courts in the Ohio case, as well as in the one involving the Times, rejected the blend, while district judges in Washington, D.C., and New Jersey weren’t convinced the Segal Blend didn’t result in a “best estimate” of the plan’s future returns.

‘Language of the Law’

Unlike earlier decisions, Tuesday’s ruling has the potential to sway employers who have considered legal action but erred on the side of caution, McNally said.

“Challenging actuary methodology is not an inexpensive decision, especially when it’s been kind of uncertain or the results are somewhat mixed,” he said. “In The New York Times decision, we knew how the court would rule, but we didn’t actually get that ruling. Now that we do, employers have more of a reason to seriously consider litigating this issue.”

Time will tell if the Sixth Circuit’s interpretation becomes precedent or whether circuit courts will split over the Segal Blend enough to push the matter to the U.S. Supreme Court.

“Actuarial analyses are difficult to challenge,” said Ruth Marcott, of counsel at Kutak Rock LLP in Minneapolis. “But this is a ruling based on the language of the law, and I think employers will look to this as they consider whether to challenge an analysis that uses the Segal Blend.”