More than four decades after ERISA introduced the concept of withdrawal liability for companies participating in a multiemployer pension plan (MEPP), the Pension Benefit Guarantee Corp. (PBGC) has issued a proposed regulation addressing the permissible interest rate assumptions for these determinations. The proposal permits the most common methods for setting the interest rate but doesn’t change the rules for other actuarial assumptions. This updated article reflects PBGC’s extension of the comment deadline from Nov. 14 to Dec. 13.
An employer that stops participating in a MEPP may be subject to withdrawal liability based on the employer’s allocable share of the MEPP’s unfunded vested benefits (UVBs). ERISA requires actuaries to determine UVBs using assumptions “which, in the aggregate, are reasonable … and which, in combination, offer the actuary’s best estimate of anticipated experience under the plan.” ERISA also permits the use of actuarial assumptions and methods prescribed in PBGC regulations, but until now, no such regulations have been issued.
The interest rate assumption underlying the UVB calculation has a large impact on the resulting withdrawal liability and is often subject to scrutiny and even lawsuits. In the absence of any formal guidance for determining reasonableness for purposes of this calculation, actuaries have developed several different approaches for selecting the assumed interest rate. The most prevalent approaches are:
Currently, the funding rates are typically higher (in many cases, significantly higher) than 4044 rates. Therefore, using the funding rate generally produces lower UVBs than 4044 rates, while using a blended rate generally produces UVBs somewhere in between.
Because the interest rate can have a substantial effect on a withdrawn employer’s financial exposure, employers sometimes object to the chosen rate and initiate arbitration or litigation to win a reduction in the withdrawal liability assessment. These disputes often question whether an actuary can have two very different “best estimates” of future experience — one for minimum funding and the other for UVBs. These disputes have produced mixed outcomes.
In light of several recent lawsuits over interest rates for withdrawal liability calculations, PBGC is proposing some long-awaited guidance. The proposal would permit the funding rate, 4044 rates or any rate that falls in between, including a blended rate.
The proposal is specific only about the interest rate, while all other actuarial assumptions are subject to a reasonableness requirement and must offer the MEPP actuary’s best estimate of anticipated experience. However, neither the process by which the interest rate assumption is selected nor the selected assumption itself is subject to any reasonableness requirement. (The proposed regulation doesn’t address the interplay, if any, between the exemption of any selected interest rate from the reasonableness requirement and ERISA’s dispute resolution provisions, under which a MEPP’s UVB determination, if deemed unreasonable, loses the presumption of correctness.)
The proposal doesn’t identify who is responsible for selecting the interest rate. The proposal doesn’t appear to require that the MEPP’s actuary set the rate, even though the actuary remains obligated to select all other relevant actuarial assumptions.
The proposed regulation’s preamble makes it clear that one of PBGC’s primary objectives is to encourage the use of 4044 rates for withdrawal liability determinations, in an effort to counter several recent court decisions requiring interest assumptions based on anticipated investment return. As noted above, 4044 rates currently produce the highest UVB amounts and larger withdrawal liability assessments than the funding rate or a blended rate.
PBGC believes the proposal will lessen the litigation risk for plans using the 4044 rates, reduce the cost shifting from withdrawn employers to remaining employers that arises from using higher rates, and increase the security of plan participants and the entire multiemployer system.
PBGC estimates that between 5% and 20% of MEPPs will switch to the 4044 rates if the proposal is finalized, leading to a projected increase in the present value of withdrawal liability payments of $0.8–$3.0 billion over the next 20 years across all plans. The effect of the proposal on a particular employer would depend on whether its withdrawal liability was effectively limited by the 20-year cap on installment payments. In some situations, the cap would apply even if the plan used a blended rate or the funding rate. In those situations, a switch to 4044 rates would have no financial impact on the employer.
PBGC requested comments on the entire proposal but is particularly interested in the following:
The proposal originally provided a 30-day comment period ending Nov. 14. However, in response to requests from interested parties, PBGC announced on Nov. 9 that it would extend the deadline for an additional 30 days to Dec. 13.