Employers facing potential withdrawal liability when closing facilities or withdrawing from underfunded multiemployer pension plans received some welcome news last month. In a noteworthy decision, a federal district court rejected a commonly used formula to calculate withdrawal liability. In the decision in The New York Times Company v. Newspaper and Mail Deliverers’-Publishers’ Pension Fund, et al., Nos. 17-CV-6178-RWS, 17-CV-6290-RWS (S.D.N.Y. Mar. 26, 2018), the court held that use of the so-called Segal Blend method of valuing a plan’s unfunded vested benefits to calculate withdrawal liability was a “mistake” and without statutory support under ERISA.
Multiemployer pension plans are created where “multiple employers pool contributions into a single fund that pays benefits to covered retirees who spent a certain amount of time working for one or more of the contributing employers.” Recognizing that these plans, while beneficial, could become seriously underfunded Congress passed the Multiemployer Pension Plan Amendment Act of 1980 (“MPPAA”), amending the Employee Retirement Income Security Act of 1974 (“ERISA”), to protect plans from the adverse consequences that resulted when individual employers terminate their participation in, or withdraw from, multiemployer plans.
The dispute arose because the Fund determined that The New York Times had partially withdrawn from the plan in two consecutive years and assessed withdrawal liability against the Times.
One issue before the court was whether the discount rate used by the Fund when assessing the Times’ withdrawal liability was appropriate. The Fund had calculated the Times’ withdrawal liability using the Segal Blend method, a proprietary method established by the Segal Company, an actuarial firm. The Segal Blend has been used commonly by funds because it uses a lower interest rate when calculating an employer’s withdrawal liability than typically used for funding, thereby resulting in a larger withdrawal liability to the fund. The Fund assessed the Times’ withdrawal liability in an amount in excess of $33 million. An arbitrator upheld the Fund’s use of the Segal Blend. The Times sued to vacate the award challenging the use of the Segal Blend when calculating its withdrawal liability.
Judge Sweet held that the Fund’s use of the Segal Blend rate when calculating the Times’ withdrawal liability was, in this instance, improper, and reversed the arbitrator’s approval of the use of the Segal Blend. The court found that the use of the Segal Blend uniquely in the context of calculating an employer’s withdrawal liability is not prohibited as a matter of law, but that its application in the present context was improper and violated ERISA.
The court found that ERISA requires that when calculating an employer’s withdrawal liability, “actuarial assumptions and methods” must, “in the aggregate, [be] reasonable (taking into account the experience of the plan and reasonable expectations) and … in combination, offer the actuary’s best estimate of anticipated experience under the plan.” 29 U.S.C. § 1393(a) (1) (emphasis added).
The actuary’s testimony before the arbitrator was that a 7.5% percent assumption was her “best estimate of how the Pension Fund’s assets . . . will on average perform over the long term.” She testified that she had used the Segal Blend as her “best estimate” when calculating withdraw liability “regardless of the particular pension plan’s actual portfolio of assets.”
Judge Sweet wrote that, if 7.5% was the Fund actuary’s “best estimate,” it strains reason to see how the Segal Blend, a 6.5% rate derived by blending that 7.5% “best estimate” assumption with lower, no-risk PBGC bond rates, could be accepted as the anticipated plan experience. This is especially true when the blend includes interest rates for assets not included in the Fund’s portfolio.
Judge Sweet found that the arbitrator “did not actively engage with the issue of whether the Segal Blend’s rate was a reasonable best estimate.” In sum, “the actuary’s testimony, combined with the untethered composition of the Segal Blend and paucity of analysis by the Arbitrator,” convinced the court that “a mistake has been made” in accepting the Segal Blend. Accordingly, the court reversed the arbitrator’s decision that the Segal Blend was the appropriate rate, and further found that, in the absence of additional evidence sufficient to support a different rate, the Times’ liability should be recalculated using the 7.5% assumption testified to as the “best estimate.”
It is expected that this decision will be appealed to the Second Circuit. In the meantime, employers facing withdrawal liability should examine whether the fund’s actuary has used the Segal Blend. It may be that a reduction in withdrawal liability is in order.