D.C. Circuit Holds Withdrawal Liability Interest Rate Must Reflect Plan’s Investment Policy

On Friday, July 8, 2022, the U.S. Court of Appeals for the D.C. Circuit issued its decision in United Mine Workers of America 1974 Pension Plan v. Energy West Mining Company, joining the Sixth Circuit in holding that the assumptions used by a multiemployer defined benefit pension plan in calculating the amount of withdrawal liability owed by an exiting employer must reflect the actual and projected experience of the plan. This calls into question the continued viability of a popular practice among some funds—that of using an interest rate assumption for purposes of determining withdrawal liability that is much lower than the interest rate assumption used to determine a plan’s minimum funding requirements.

Withdrawal Liability Under ERISA

The Employee Retirement Income Security Act of 1974 (ERISA), as amended by the Multiemployer Pension Plan Amendments Act of 1980 (MPPA), sets minimum funding and other standards for employer-sponsored benefit plans, including multiemployer defined benefit pension plans. Under ERISA and MPPA, an employer that exits a multiemployer plan must pay “withdrawal liability” to the fund in an amount to cover the exiting employer’s share of the plan’s existing unfunded liabilities.

This withdrawal liability is determined by plan actuaries, using actuarial assumptions that must be “reasonable (taking into account the experience of the plan and reasonable expectations),” in the aggregate, and must “offer the actuary’s best estimate of anticipated experience under the plan.” 29 U.S.C. 1393(a)(1).

Interest Rate Assumption

An actuary’s interest rate assumption—the fund’s expected long-term growth rate of its assets—is of critical importance in determining withdrawal liability. Withdrawal liability calculations attempt to allocate to an exiting employer its share of the fund’s unfunded liabilities. And so, if the plan’s assets are expected to have a higher growth rate, the plan’s projected unfunded liabilities will be lower, resulting in a lower withdrawal liability assessment.  But, if the plan’s assets are expected to have a lower growth rate, the projected unfunded liabilities will be higher, resulting in a higher assessment.

Plan actuaries also rely on interest rate assumptions in determining the amount of annual contributions required for the plan to meet the minimum funding standards set by ERISA. As with a withdrawal liability determination, the minimum funding calculation relies on a projection of the plan’s long-term growth to determine the amount of unfunded liabilities. The interest rate assumption generally takes into account the plan’s historic investment performance and current investment policy.

Historically, many plans have used different interest rate assumptions for minimum funding and withdrawal liability calculations.

Energy West Decision

In Energy West, the United Mine Workers of America 1974 Pension Plan assessed withdrawal liability against the company for a 2015 withdrawal from the fund. To determine the amount of withdrawal liability owed, instead of using an interest rate assumption based on the plan’s historical investment performance—around 7.5 percent—the plan used a risk-free discount rate of 2.71 percent (that is, a rate based on an assumption of the fund making risk free investments). Energy West challenged the fund’s use of this interest rate assumption, which resulted in withdrawal liability that was $75 million greater than if the higher interest rate had been used. In defense of this rate, the fund argued that use of a risk-free rate, essentially a settlement rate, is appropriate for withdrawal liability since a withdrawn employer no longer bears risk with respect to its unfunded liabilities under the plan.

The D.C. Circuit rejected this argument, relying on statutory text requiring that actuarial assumptions used for purposes of determining withdrawal liability “offer the actuary’s best estimate of anticipated experience under the plan.” 29 U.S.C. 1393(a)(1). Risk-free rates are not appropriate, reasoned the court, if the plan is currently and projects to continue to be invested in riskier assets, as such a rate fails to take into account the characteristics of the particular plan. Instead, interest rate assumptions used for withdrawal liability calculations must reflect the plan’s investment policy.

In reaching this conclusion, the D.C. Circuit relied on the Sixth Circuit’s 2021 decision in Sofco Erectors, Inc. v. Trustees of the Ohio Operating Engineers Pension Fund, rejecting that fund’s use of the Segal Blend—a blended rate based on both the plan’s minimum funding interest rate and the PBGC’s risk-free rate—in a withdrawal liability calculation.  Sofco reasoned that this was improper under ERISA because it was not selected as the result of the actuary’s best estimate of anticipated experience under the plan. Instead, the fund had argued, the Segal Blend was selected as a settlement rate, allowing the fund to transfer some risk to the withdrawing employer, in line with “accepted actuarial practice.” The Sixth Circuit rejected these rationales as not sanctioned by ERISA, which requires the actuary to select the rate that, taking into account the plan’s characteristics, offers the best estimate of anticipated experience under the plan.

Observations and Recommendations

These recent decisions call into question multiemployer funds’ common practice of using an interest rate assumption for the purpose of determining an employer’s withdrawal liability that is lower than the assumption used by the plan in determining minimum funding standards. While Energy West does not require a plan to use its exact minimum funding rate for withdrawal liability calculations, it does require a plan’s withdrawal liability interest rate to be “similar” to the minimum funding rate and reflect the plan’s actual characteristics, including its current and projected investment policy. These decisions will put increased pressure on funds to justify the use of a withdrawal liability rate that varies from the plan’s minimum funding rate.

Information contained in this publication is intended for informational purposes only and does not constitute legal advice or opinion, nor is it a substitute for the professional judgment of an attorney.