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For some time, several multi-employer defined benefit pension plans have been in a state of crisis, with a substantial number facing imminent insolvency. While one can argue about the cause of this crisis – and there is plenty of blame to go around – one thing is certain: employers that paid their required pension contributions are not at fault. Nevertheless, for years employers have paid the price of pension fund failings in the form of withdrawal liability.

There was initially some hope that this situation would be resolved by the American Rescue Plan Act of 2021, which provided for a taxpayer-funded bailout of the worst of the failing pension funds. However, whether employers would get any real relief as a result of these bailouts was largely left in the hands of the Pension Benefit Guaranty Corporation (“PBGC”).

On August 8, 2022 the PBGC answered this question in the negative. While employers contributing to pension funds facing imminent insolvency can breathe a sigh of (temporary) relief, for the next decade or two, these employers will not get relief from their withdrawal liability.

The PBGC’s Final Rule regarding Funds that receive a bailout (termed “Special Financial Assistance,” or “SFA” – the pension world’s rough equivalent to a “special military operation”) allows plans receiving a bailout to invest up to 33% of their SFA funds in return-seeking assets (RSA), with the remaining 67% restricted to high-quality fixed-income investments and will better enable plans to remain solvent through 2051 following their receipt of SFA.

However, when calculating a plan’s withdrawal liability, the Final Rule requires that plans use mass withdrawal interest rate assumptions when calculating an employer’s withdrawal liability until the later of 10 years after the end of the year in which the plan receives SFA or the time at which the plan no longer holds SFA monies. Because the interest rateassumptions applied to plans terminated by mass withdrawalare significantly lower than the interest rates used by many plans for purposes of projecting the estimated rate of return on plan investments, the potential withdrawal liability for employers withdrawing from a plan that has received SFA will dramatically increase. 

The PBGC’s Final Rules also requires plans to phase in the amount of SFA that is counted as a plan asset when calculating the plan’s unfunded vested benefits for purposes of calculating withdrawal liability. This begins from the first plan year in which the plan receives payment of SFA and continues through the end of the plan year in which, according to the plan’s projections, it will exhaust any SFA assets. This condition applies for withdrawals occurring after the plan year in which the plan receives payment of SFA. For example, if an employer withdraws in the first plan year in which the plan receives payment of SFA and the plan is projected to exhaust its SFA assets in 20 years, then only one-twentieth of the assets received by the plan in SFA will be counted as plan assets when calculating the plan’s unfunded vested benefits for withdrawal liability purposes. This means that it will take a substantial amount of time for SFA bailout monies to potentially reduce withdrawal liability.

On Friday, October 14, 2022, the PBGC added insult to injury when it issued a Notice of a Proposed Rule that would essentially breathe new life into the method behind the Segal Blend and allow pension funds to use different interest rates for purposes of projecting the expected financial performance of the fund as opposed to assessing withdrawing employers for withdrawal liability.

The use of the methodology behind the “Segal Blend” was being successfully challenged in court, and 3 federal courts of appeal invalidated the use of the conceptual methodology behind the Segal Blend based on the plain language of ERISA, which the courts found directs that the fund use the actuary’s “best estimate of anticipated experience under the plan” for purposes of calculating withdrawal liability.  The Segal Blend and similar methodologies did not do so, and instead chose to blend the actuary’s best estimate of the plan’s anticipated experience with the PBGC’s much lower interest rate used for purposes of calculating mass withdrawal liability, creating a fictitious, lower interest rate to prevent employer withdrawals. 

A fund using a blend methodology could be well into the green zone (and have assets with a market value of its of over 100% of its vested benefits) and still assess withdrawing employers millions of dollars in withdrawal liability.

Such an incongruous result has led to these blended methodologies being repeatedly invalidated by the courts. The United States Court of Appeals for the District of Columbia Circuit, the United States Court of Appeals for the Sixth Circuit, the United States District Court for the Southern District of New York, and the United States District Court of Appeals for the Ninth Circuit have all invalidated the use of these methodologies based on the plain language of ERISA.

Unfortunately, the story does not end here. The PBGC’s proposed Rule would breathe new life into these blended methodologies through fiat, essentially declaring that they are acceptable because the PBGC has passed a rule declaring that they are acceptable. The PBGC’s motive for doing so – purportedly, that it believes that withdrawing employers are somehow obtaining a benefit by withdrawing from the funds without having to face future uncertain investment returns – is suspect at best.

This is because an actuary’s projected interest rate for a fund is supposed to be “expected returns on the plan’s funds as currently invested” – in other words, the actuary’s projected interest rate for a plan is already supposed to predict and account for the plans uncertain investment returns. Because the actuary’s interest rate is already supposed to account for the uncertainty of future returns on the plan’s investments, there is no need to “blend” the actuary’s interest rate with a lower interest rate in order to account for future market uncertainties – the actuary’s normal interest rate is supposed to have taken these uncertainties into account.

The purpose of withdrawal liability is to make sure that employers who withdraw from the plan pay their fair share of the plan’s unfunded vested benefits. However, if a plan does not have any unfunded vested benefits (based on the interest rate that the plan’s actuary represents takes into account the expected returns on the plan’s funds as currently invested, then there should be no withdrawal liability because the withdrawing employer’s fair share of the plan’s unfunded vested benefits of zero should be zero.

The purpose of withdrawal liability is not to prevent employers from withdrawing from pension funds. However, ERISA may provide the PBGC with a loophole that enables it to change the rules of withdrawal liability. Under 29. U.S.C. § 1393(a), withdrawal liability may be determined either by reasonable actuarial assumptions offering the actuary’s best estimate of anticipated experience under the plan or by actuarial assumptions and methods set forth within the corporation’s regulations. Thus, the wording of the statute may give the PBGC the legal power to breathe new life into the blend methodology, to the detriment of employers who want to withdraw from a multi-employer pension plan.

There are many legitimate reasons for employers to withdraw from pension plans, including the sale of a business, the closing of a business, the relocation of a business or other changes in business operations. The purpose of withdrawal liability is not to punish employers for withdrawing from plans in order to deter withdrawals and/or create windfall income for the funds. Unfortunately, the PBGC seems to believe otherwise, and there is no immediate relief on the regulatory horizon for employers.