Federal Court Ruling May Signal A Changing Landscape For Withdrawal Liability

• Published date: 27 October 2021
• Subject Matter: Employment and HR, Insolvency/Bankruptcy/Re-structuring, Insolvency/Bankruptcy, Retirement, Superannuation & Pensions, Employee Benefits & Compensation
• Law Firm: Stevens & Lee
• Author: Mr John C. Kilgannon

An important decision by the United States Court of Appeals for the Sixth Circuit may significantly impact withdrawal liability assessments. In Sofco Erectors, Inc. v. Trustees of the Ohio Operating Engineers Pension Fund,¹ the Court held that the pension fund could not utilize the "Segal Blend" interest rate to calculate the employer's withdrawal liability. In so doing, the Sofco Court stated that the Segal Blend rate was based on a hypothetical rate of return that did not accurately reflect the current financial state of the fund. Application of a higher interest rate assumption was undoubtedly good news for the employer insofar as it will result in a lower withdrawal liability assessment. While the Sofco decision is only one of a few federal court opinions² that disapproved of the Segal Blend, this most recent ruling may persuade other courts to follow suit.

Multiemployer Plans and Withdrawal Liability

Before delving into the Sofco decision, a brief review of multiemployer pension plans, withdrawal liability and interest rate assumptions is warranted. Multiemployer pension plans are funded by contributions from two or more unrelated employers, typically within the same industry. It is no secret that many multiemployer plans experienced funding deficiencies. To address those underfunding issues, Congress enacted the Multiemployer Pension Plan Amendments Act of 1980 ("MPPAA"). Among other things, MPPAA imposed financial obligations, known as withdrawal liability, on employers that withdrew from underfunded multiemployer plans. Stated generally, withdrawal liability represents the employer's proportionate share of the pension fund's underfunded present and future benefit obligations, determined as the excess of the fund's vested benefit liability relative to the fund's assets.

The Role of Interest Rate Assumptions in Withdrawal Liability Calculations and Minimum Funding Analysis

Pension funds hire actuaries to evaluate minimum funding levels and withdrawal liability. Analysis of funding levels is critical in determining whether the pension fund has sufficient assets to pay future liabilities. This process requires the actuary to determine the present value of future liabilities or, in other words, what assets the pension fund needs today to pay future liabilities. In performing this analysis, the actuary must make certain assumptions about the rate of return those current assets will generate. If, for example, the pension fund experiences a high rate of...