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On October 14, 2022, the Pension Benefit Guaranty Corporation (“PBGC”) published a proposed rule that would grant multiemployer pension plans significant flexibility in determining the interest rate used to calculate the withdrawal liability owed by a withdrawing employer.

By way of background, when an employer withdraws from an underfunded multiemployer pension plan, it generally owes withdrawal liability to the plan based on its share of the plan’s unfunded vested benefits, or UVBs.  To determine the employer’s share of the UVBs, the plan actuary must determine the UVBs’ present value, the amount of which may vary substantially based on the interest rate used.  A higher interest rate results in a lower present value of UVBs and vice versa.

Section 4213(a) of ERISA authorizes PBGC to issue regulations with assumptions and methods that actuaries may use in determining withdrawal liability; however, PBGC has declined to do so until now.  Section 4213(a) goes on to provide that withdrawal liability shall be determined on the basis of:
(1) “actuarial assumptions and methods which, in the aggregate, are reasonable (taking into account the experience of the plan and reasonable expectations) and which, in combination, offer the actuary’s best estimate of anticipated experience under the plan,” which is pursuant to Section 4213(a)(1); or (2) actuarial assumptions and methods promulgated pursuant to PBGC regulations, which is pursuant to Section 4213(a)(2).

In the proposed rule, PBGC notes that plan actuaries generally have taken one of three broad approaches to determine the appropriate interest rate for calculating an employer’s share of UVBs.  The first is to use the assumed rate of investment return used by the plan to determine its minimum funding requirements (“minimum funding rate”).  The second is an interest rate that approximates the market price to purchase annuities to cover the withdrawing employer’s share of UVBs (“annuity rate”).  The third is a blend of the first two. The proposed rule would authorize plan actuaries to select any rate that falls between the minimum funding rate and the annuity rate.  In other words, the use of the minimum funding rate, the annuity rate, or any rate in between would be acceptable under the proposed rule and would protect the plan from facing a challenge to its withdrawal liability assessment based upon the interest rate selected.

This change would apply to withdrawals on or after the effective date of any final rule, which would be issued only after the PBGC considers comments on the proposed rule.  However, while the proposed rule would not have retroactive effect, the proposed rule notes that it does not preclude the use of its proposed interest rate assumptions for withdrawals that occur before the effective date of the final rule.   As a result, while the proposed rule does not prohibit the use of its assumptions retroactively, the use of any rate other than the minimum funding rate could continue to be challenged as not reasonable actuarial assumptions and not the actuary’s best estimate under Section 4213(a)(1), if used for any withdrawals that occur before the effective date of the final rule.

In recent years, the use of blended rates has been called into question by the courts, with some courts holding that the rate used to calculate UVBs generally must be the same as, or at least similar to, a plan’s expected rate of investment return used for minimum funding.  However, in these cases, the courts have acknowledged that PBGC has authority under Section 4213(a) to promulgate regulations authorizing the use of such blended rates.

Some have questioned whether the proposed rule calls for the trustees, rather than the actuary, to determine the interest rate, even though the proposed rule states that it is the actuary’s determination. Another issue that needs to be clarified is whether any action is required by the plan sponsor or plan actuary to reflect whether it is using the interest rate assumption that constitutes the actuary’s best estimate under Section 4213(a)(1) or the interest rate authorized by PBGC’s proposed rule promulgated under Section 4213(a)(2).  Section 4213(a) states that PBGC may prescribe by regulation actuarial assumptions that “may be used by a plan actuary” and therefore it would appear that the actuary continues to make the determination and no further action would appear to be required by the  plan or plan actuary in continuing to use the same assumptions.  We anticipate that PBGC’s final rule may provide additional guidance on these questions, if only to avoid further challenges to the determination of withdrawal liability.

PBGC has requested comments on its proposed rule by November 14, 2022, specifically regarding whether the final rule should restrict the available options to a narrower range of interest rates or permit only specific methodologies for determining the rate; whether the rate assumption should be affected by a plan’s estimated date of plan insolvency, expected investment mix, or funded ratio; and whether the final rule should specify any actuarial assumptions or methods other than interest rate assumptions.

Please contact Slevin & Hart for more on how the proposed rule could affect your plan.

This publication is intended to provide general information only, and is not intended to provide legal advice. The distribution of our publications is not intended to create, and receipt of them does not constitute, an attorney-client relationship. Permission is granted to make and redistribute, without charge, copies of this entire document provided that such copies are complete and unaltered and identify Slevin & Hart, P.C. as the author.  All other rights reserved.

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