Multiemployer plan erred by not using actuary’s “best estimate” of funding shortfall to compute withdrawal liability

A multiemployer plan violated ERISA when it chose not to use its actuary’s “best estimate” of the plan’s funding shortfall for purposes of calculating withdrawal liability, the U.S. Court of Appeals in Chicago (CA-7) has ruled. The Seventh Circuit upheld an arbitrator’s conclusion that use of an alternative calculation method overestimated an employer’s share of withdrawal liability by just over $1 million.

Calculating funding shortfalls

Multiemployer plans must calculate their unfunded vested benefits (or funding shortfall) to (1) determine withdrawal liability and to (2) make the minimum contribution to the plan required by the IRS to avoid a tax penalty.

Critical to calculating a funding shortfall is the selection of the interest rate used to estimate the plan’s ability to meet its future obligations. ERISA §4213(a)(1) requires plan actuaries to use interest rate assumptions that are reasonable and represent their “best estimate” of the plan’s future experience.

Segal blended rate

The Segal Company, acting as actuary for the multiemployer plan, used two different methods to calculate the plan’s funding shortfall. The method used to calculate withdrawal liability purposes was known as the “Segal Blended Rate.” The calculation method used for tax purposes was called the “funding interest assumption.”

For many years the Blended Rate method generated a higher interest rate estimate than did the funding assumption rate, making the estimate of the plan’s shortfall smaller for purposes of calculating withdrawal liability. By the mid-90s, however, the Blended Rate was lower than the funding interest assumption rate.

In 1997, Segal told plan trustees they could direct Segal to use the higher of the two rates each year to calculate withdrawal liability. From 1996 to 2004, the funding interest assumption rate, which the trustees directed Segal to use, was higher in every year but one. Then, in 2004, the trustees directed Segal to revert to using the Blended Rate again, even though that rate was still lower than the funding assumption rate.

These decisions by the plan had the effect of increasing the withdrawing employer’s liability $1 million more than the amount it would have owed had the Segal blended rate been used throughout the period.

An arbitrator determined that the funding interest assumption rate was not the actuary’s best estimate and was therefore unreasonable under ERISA. Thus, the employer’s liability amount had been overstated by $1 million. The district court affirmed the arbitrator’s decision.

Appellate court

The appellate court also affirmed the arbitrator’s ruling in favor of the employer. Segal consistently maintained that the Blended Rate was its best estimate of the right interest rate to use to calculate withdrawal liability. Use of the actuary’s “best estimate” is required by ERISA.

No evidence was presented to suggest that the switch to the other rate reflected anything other than the desire of the trustees to manipulate withdrawal liability amounts. The court seemed skeptical of the assertion that language in a 1993 Supreme Court decision (Concrete Pipe and Prods. v. Construction Laborers Pension Trust, 508 U.S. 602 (1993)) had prompted the 1997 change. Instead, the court speculated that the trustees’ priorities had shifted over time from attracting more employers with the prospect of low withdrawal liability, to “extracting higher exit prices” from employers who withdrew.

Source: Chicago Trust Drivers, Helpers and Warehouse Workers Union (Independent) Pension Fund v. CPC Logistics, Inc. (CA-7).

For more information, visit http://www.wolterskluwerlb.com/rbcs.

For more information on this and related topics, consult the CCH Pension Plan Guide, CCH Employee Benefits Management, and Spencer’s Benefits Reports.

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