Pension Insurer Proposal Stems Rising Tide of Liability Suits

Federal regulators have blessed a controversial method for calculating the penalty companies must pay when exiting multiemployer pension plans, dismantling an emerging legal strategy that threatened the future of union-brokered plans.

The Pension Benefit Guaranty Corporation, which is tasked with insuring private-sector plans, issued a proposed rule this month that would allow those plans to choose the interest rates they use to calculate the unfunded liability individual employers pay when they’re withdrawing from a joint pension arrangement.

The proposed regulation would effectively green-light the “Segal Blend,” an increasingly popular mix of interest rates that hit a major stumbling block last year when the US Court of Appeals for the Sixth Circuit said it violated federal law.

The Segal Blend, a product of the massive US actuarial firm 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. But blended rates have become more popular and equally contentious in a low-interest-rate environment, as they can mean higher costs for exiting employers and a deterrence to companies considering that move.

An employer that partly or completely exits a multiemployer pension 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 PBGC’s proposed rule would weigh in on a fiery debate over whether that exit charge is or even can be an effective tool to stem the tide of companies choosing to abandon pensions for cheaper and less risky 401(k)s.

“I think PBGC is trying to use the regulation to shackle employers to these plans—to make it so they do not want to withdraw—but I actually think it’s going to end up having the opposite effect,” said Sarah Bryan Fask, a Littler Mendelson PC shareholder in Philadelphia.

Mounting Challenge

The Sixth Circuit in September 2021 rejected the Segal Blend as a violation under the Employee Retirement Income Security Act of 1974 (Pub.L. 93-406). That decision set the stage for a wave of emboldened employers to mount a legal challenge to their own plans’ use of the rates.

Blended rates popularlized by Segal combine the cost an employer would pay if it purchased annuities at current market rates with an actuary’s best estimate of future investment returns used to determine the plan’s minimum funding requirement under ERISA.

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 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 employer bears the burden of proving that the analysis is unreasonable or erroneous, 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 ERISA because it doesn’t singularly reflect an actuary’s best estimate of future returns.

“When you’ve got the largest actuarial firm in this space using a method that the Sixth Circuit has said is no bueno, that’s a real problem,” said Michael McNally, a partner at Fox Rothschild LLP in Minneapolis who specializes in withdrawal liability.

Since that decision, the District of Columbia Circuit determined in July that a United Mine Workers plan couldn’t strap an exiting energy company with calculations that relied on risk-free projected investment returns. The interest rate used to calculate the employer’s unfunded share in the plan should take into account a true reflection of projected returns, the court ruled.

A third case pending in the Ninth Circuit threatened a circuit split, which the PBGC proposal forestalls.

‘Best Estimate’

The PBGC’s proposed rule was 42 years in the making. Congress gave the agency permission to set withdrawal liability interest rates in 1980. In the meantime, lawmakers said plans could choose their own rates as long as they were reasonable and an actuary’s “best estimate of anticipated experience under the plan.”

In the wake of the Sixth Circuit ruling and a creeping litigation strategy, the agency has proposed letting plans choose any rate as long as it isn’t below the conservation rates the agency already uses to determine mass withdrawal, or greater than a plan’s assumptions for investment returns.

“It gives more guidance to judges in terms of what they should and shouldn’t be looking at—what they’re allowed to make a decision on,” said David Brenner, a senior Segal vice president and national director of multiemployer consulting.

The PBGC admits that its proposal “will deter employer withdrawals,” but it’s unclear whether that’s the goal. The agency declined to comment beyond a prior press release on its proposal.

Part of the agency’s mission is to protect the retirement security of its members, and an argument can be made that deterring employers from exiting the system does that, said McNally. But withdrawal liability, and especially a blended interest rate that puts a heavy burden on employers, may be a barrier for entry into the pension market.

“How many employers are going to choose to join a plan they know will be so expensive to leave?” he said. “They’re going to say, ‘No thanks.’”

There also remain questions about the PBGC’s approach. The section of ERISA outlining the agency’s authority to prescribe actuarial assumptions also requires those assumptions to be reasonable, opening up what may be another door for plaintiffs to poke holes in burdensome withdrawal liabilities if the proposed rule is finalized as is.

The proposal may also be a final nail in the coffin for employers wary of what they view as a one-sided approach the PBGC has taken in the employer-plan conflict.

“I think by telling plans that these mass withdrawal rates are reasonable, all plans are going to feel pressure to use those rates,” said Littler Mendelson’s Fask. “At that point, for a solvent employer who can get out, exit, and pay their withdrawal liability, there’s no point for them to stay in these plans.”