PBGC Issues Proposed Rule On Withdrawal Liability Actuarial Interest Rate Assumptions

• Published date: 18 October 2022
• Subject Matter: Employment and HR, Retirement, Superannuation & Pensions, Employee Benefits & Compensation
• Law Firm: Littler Mendelson
• Author: Ms Sarah Bryan Fask, Michael Congiu, Michael R. Link and Eric D. Field

On October 14, 2022, the Pension Benefit Guaranty Corporation (PBGC), the federal agency that insures and regulates private-sector defined benefit pension plans under Title IV of the Employee Retirement Income Security Act of 1974 (ERISA), published a proposed rule governing employer withdrawal liability. The proposal authorizes a range of interest rate assumptions that a plan actuary may choose from when calculating an employer's withdrawal liability. According to the PBGC, the proposed rule will increase withdrawal liability obligations of employers by between $804 million and $2.98 billion over the next 20 years.

Background on Withdrawal Liability and Interest Rates

ERISA mandates that, under most circumstances, an employer withdrawing from a multiemployer pension plan is responsible for paying withdrawal liability-generally calculated as the employer's "share" of any unfunded vested benefits (UVBs) the plan has at the end of the plan year preceding the employer's withdrawal.¹ UVBs are the amount by which the present value of nonforfeitable benefits owed by a plan (as of the valuation date) exceeds the value of plan assets (as of that date).² In other words, the UVBs are intended to represent the shortfall a fund anticipates between the pension benefits the fund must pay out in the future and the amount of money the fund expects to have.

The present value of a plan's nonforfeitable benefits must be determined by the plan's actuary using actuarial assumptions and methods.³ A plan's actuarial assumptions include the interest rate-often called the "discount rate"-that is used to convert future benefit payments to their present value. An actuary's use of a higher discount rate decreases the present value of nonforfeitable benefits, resulting in lower UVBs (and less withdrawal liability), whereas use of a lower discount rate increases the present value of nonforfeitable benefits resulting in higher UVBs (and more withdrawal liability).

According to the PBGC, there are three common approaches actuaries utilize to determine the appropriate interest/discount rate:

• Approach No. 1: Use of the same interest rate assumption used to determine minimum funding requirements. This approach uses the interest rate assumption under 431(b)(6) of the IRS Code and section 304(b)(6) of ERISA (funding rate interest assumption).⁴ (The funding rate interest assumption tends to be high as funds want to project confidence in the amount of assets and demonstrate they have met...