6th Circuit rules pension fund didn’t properly calculate withdrawal liability

The U.S. 6th Circuit Court of Appeals (whose rulings apply to all Michigan employers) recently decided a case involving an employer that withdrew from an underfunded, multiemployer pension plan. According to the court, the actuary didn’t use the best estimate when determining the employer’s share of the unfunded liability under the Employee Retirement Income Security Act (ERISA).

Background

When an employer has an obligation to contribute to a multiemployer pension fund, and the fund is underfunded (a deficit between assets and future projected payout obligations), an employer that ceases to have an obligation to contribute to the fund will be assessed a share of the unfunded liability under ERISA. Importantly, when the fund’s minimum funding levels are calculated (critical to the withdrawal liability assessment), the actuary takes into account their best estimate of investment rate of return.

In Ace Saginaw Paving Co. v. Operating Eng’rs Local 324 Pension Fund, the fund used a 7.75% best estimate of rate of return. When determining a withdrawing employer’s liability for unfunded obligations, the actuary uses an interest rate to discount the pro rata share of unfunded liability to present value. The extent to which the discount rate is lower than the best estimate of rate of return has a great impact on the amount of withdrawal liability assessed.

Court’s decision