6th Circuit addresses actuarial assumptions about pension fund withdrawal liability

The 6th Circuit recently issued a long-awaited decision about the appropriateness of interest rate assumptions used by union pension funds to calculate withdrawal liability. The court affirmed a district court’s opinion holding the Ohio Operating Engineers Pension Fund’s use of the “Segal Blend” violated the Employee Retirement Income Security Act (ERISA).

How we got here

When multiemployer pension plans have unfunded “future liabilities,” employers that cease to have an obligation to contribute to them are assessed a portion of the unfunded “withdrawal liability.” Under ERISA, a plan must use reasonable actuarial assumptions to calculate the amount of lability.

Two important assumptions are what rates of liability are appropriate to (1) determine the minimum funding necessary to pay future liabilities and (2) discount the future labilities to present value. The use of a low discount rate in either situation can greatly increase the liability assessment to the withdrawing employer.

Facts and findings

The Ohio Operating Engineers Pension Fund’s best estimate of the rate of return on current assets for minimum funding purposes was 7.25%. Despite using the rate to determine the minimum funding, it relied on a “Segal Blend” rate (i.e., blending the Pension Benefit Guarantee Corporation rate of 2% to 3% with the fund’s best estimate of the rate of return, in this case 7.25%) to discount the future liabilities to present value and ultimately determine the withdrawal liability.