D.C. Circuit Breaks from Second Circuit, Finds Pension Fund May Retroactively Change Its Interest Rate Assumptions

On February 9, 2024, the U.S. Court of Appeals for the D.C. Circuit issued its decision in Trustees of IAM Nat'l Pension Fund v. M & K Emp. Sols., LLC, No. 22-7157 (D.C. Cir. Feb. 9, 2024), affirming the district court’s decision to vacate an arbitration award for the employer in a pension fund withdrawal liability case.  The D.C. Circuit found that the plan actuary’s interest rate assumption may be changed retroactively after the measurement date, even if it is based on information received after the measurement date so long as the information is “as of” the measurement date.

This decision, which splits from the Second Circuit, may cause uncertainty in future withdrawal liability disputes by putting at issue how, why, and when a plan actuary changes such a crucial assumption, and whether information provided to a plan actuary after the year-end measurement date was influenced by knowledge available after the measurement date.  The decision also creates a circuit court split on an issue that has nationwide impact on employers that contribute to multiemployer funds, and the funds themselves. 

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.  The formulas used to calculate an employer’s withdrawal liability are set out in ERISA.  Generally, however, an employer’s withdrawal liability is “its share” of the plan’s unfunded vested liabilities. 

The amount of a plan’s unfunded vested liabilities 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.” 

Interest Rate Assumption and The Measurement Date

An actuary’s interest rate assumption – the expected long-term growth rate of the fund’s assets – is critically important in determining the plan’s unfunded liabilities, and thus the employer’s withdrawal liability.  This is because the plan’s projected unfunded liabilities will be lower if the plan’s assets are expected to have a higher growth rate; so an employer’s “share” – and the dollar value of the withdrawal liability assessment – will be lower.  But, if the plan’s assets are expected to have a slower growth rate, the projected unfunded liabilities will be higher, resulting in a higher assessment against the employer. 

An employer’s withdrawal liability assessment is calculated based on the plan’s unfunded liabilities “as of” the “measurement date.”  This measurement date is the last day of the plan year preceding the year during which withdrawal liability is triggered.

M & K Employee Solutions Decision and Rejection of Second Circuit Reasoning

In M & K Employee Solutions, the Trustees of the International Association of Machinists National Pension Fund assessed withdrawal liability against two employers for a 2018 withdrawal from the plan.  As of December 31, 2017 (the measurement date), the plan was using an interest rate of 7.5% that had been selected in November 2017.  But after a meeting between the Fund’s Board and the fund actuary in late January 2018, the actuary selected a new interest rate assumption of 6.5% – to be used retroactively.  This change in the interest rate assumption caused the employers to be assessed a significantly higher withdrawal liability. 

At arbitration, the employers argued that the plan violated ERISA by changing the interest rate assumption after the measurement date of December 31, 2017, and applying the new interest rate assumption retroactively.  The arbitrator found for the employers and concluded “that the Fund erred in its calculations by utilizing the January 2018 assumptions and methods instead of those in effect on December 31, 2017.”  However, the district court reversed the arbitrator, finding that ERISA allows “later adoptions of actuarial assumptions, so long as those assumptions are ‘as of’ the measurement date—that is, the assumptions must be based on the body of knowledge available up to the measurement date.”

The D.C. Circuit agreed with the district court’s analysis and the above rule, stating that it “aligns the calculation of the plan’s experience, reasonable expectations, and the best estimate of anticipated experience ‘as of’ the measurement date, rather than the date of the calculation.” 

In reaching this conclusion, the D.C. Circuit rejected the Second Circuit’s reasoning in National Retirement Fund on Behalf of Legacy Plan of National Retirement Fund v. Metz Culinary Management, Inc., 946 F.3d 146 (2d Cir. 2020).  The Second Circuit in Metz held that ERISA requires actuaries to use the rate assumption in effect as of the measurement date and that funds may not select an interest rate assumption after such date and retroactively apply that assumption to withdrawal liability calculations.  The D.C. Circuit concluded that the Second Circuit’s reasoning “is counter to the text of the MPPA, which protects MPPs and their beneficiaries.” 

Observations and Recommendations

With its decision in M & K, the D.C. Circuit has created a circuit split.  This will undoubtedly lead to additional litigation in other circuits until either the D.C. Circuit or the Second Circuit becomes an outlier or the issue is resolved by the Supreme Court.

The holding in M & K is very fund-friendly.  This puts at issue all the facts surrounding any retroactive change in interest rate assumptions, as well as any failure to apply such assumptions retroactively.  This will make litigation of withdrawal liability disputes more complicated and expensive.

Now more than ever, employers faced with a withdrawal liability assessment or considering triggering a withdrawal should consult experienced counsel promptly. 

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.