On October 14, 2022, the Pension Benefit Guaranty Corporation (PBGC), the federal agency that insures and regulates private-sector defined benefit pension plans under Title IV of the Employee Retirement Income Security Act of 1974 (ERISA), published a proposed rule governing employer withdrawal liability. The proposal authorizes a range of interest rate assumptions that a plan actuary may choose from when calculating an employer’s withdrawal liability.  According to the PBGC, the proposed rule will increase withdrawal liability obligations of employers by between $804 million and $2.98 billion over the next 20 years.

Background on Withdrawal Liability and Interest Rates

ERISA mandates that, under most circumstances, an employer withdrawing from a multiemployer pension plan is responsible for paying withdrawal liability—generally calculated as the employer’s “share” of any unfunded vested benefits (UVBs) the plan has at the end of the plan year preceding the employer’s withdrawal.¹ UVBs are the amount by which the present value of nonforfeitable benefits owed by a plan (as of the valuation date) exceeds the value of plan assets (as of that date).² In other words, the UVBs are intended to represent the shortfall a fund anticipates between the pension benefits the fund must pay out in the future and the amount of money the fund expects to have.   

The present value of a plan’s nonforfeitable benefits must be determined by the plan’s actuary using actuarial assumptions and methods.³  A plan’s actuarial assumptions include the interest rate—often called the “discount rate”—that is used to convert future benefit payments to their present value.  An actuary’s use of a higher discount rate decreases the present value of nonforfeitable benefits, resulting in lower UVBs (and less withdrawal liability), whereas use of a lower discount rate increases the present value of nonforfeitable benefits resulting in higher UVBs (and more withdrawal liability).

According to the PBGC, there are three common approaches actuaries utilize to determine the appropriate interest/discount rate:

• Approach No. 1:  Use of the same interest rate assumption used to determine minimum funding requirements.  This approach uses the interest rate assumption under 431(b)(6) of the IRS Code and section 304(b)(6) of ERISA (funding rate interest assumption).⁴  (The funding rate interest assumption tends to be high as funds want to project confidence in the amount of assets and demonstrate they have met ERISA’s funding obligations.)

• Approach No. 2:  Use of the settlement interest rate assumptions prescribed by the PBGC under section 4044 of ERISA, which are required to be used for determining the present value of nonforfeitable benefits in a terminating single-employer pension plan, and for determining the present value of nonforfeitable benefits in a multiemployer plan that has incurred a mass withdrawal.⁵ (These rates tend to be low.)

• Approach No. 3:  Use of a “blend” of both the funding rate interest assumption and the settlement interest rate assumption described above by, for example, valuing liabilities that can be matched to current plan assets at the ERISA Section 4044 interest rate, and valuing liabilities for which no assets currently exist at the plan’s funding rate. 

Summary of the Proposed Rule

ERISA section 4213(a) states:

The [PBGC] may prescribe by regulation actuarial assumptions which may be used by a plan actuary in determining the unfunded vested benefits of a plan for purposes of determining an employer’s withdrawal liability under this part. Withdrawal liability under this part shall be determined by each plan 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, or

(2) actuarial assumptions and methods set forth in the [PBGC’s] regulations for purposes of determining an employer’s withdrawal liability.⁶

In light of several recent court rulings to the contrary,⁷ and purportedly acting under ERISA section 4213(a)(2) as stated above, the PBGC’s proposed rule seeks to “make clear that use of 4044 rates [the settlement interest rate], either as a standalone assumption or combined with funding interest assumptions represents a valid approach to selecting an interest rate assumption to determine withdrawal liability in all circumstances.”  The proposed rule, however, does not prescribe any specific assumptions (interest rate or otherwise)—the express authority granted to PBGC under ERISA section 4213(a)—but instead defers to a plan actuary’s selection of an “interest rate anywhere in the spectrum from 4044 rates alone to funding rates alone.” The proposed rule further provides that a “plan’s actuary would be permitted to determine withdrawal liability under the proposed rule without regard to section 4213(a)(1) [including foregoing the reasonableness and actuarial best estimate requirements].” The PBGC’s proposed rule is silent on how the use of an interest rate selected by the plan’s actuary that ignores any reasonableness or actuarial best estimate requirements satisfies ERISA Section 4221(a)(3)(B)(i)’s requirement that the actuarial assumptions and methods used in determining liabilities for purposes of calculating withdrawal liability must, in the aggregate, be reasonable when taking into account both the experience of the plan and the plan’s reasonable expectations (with no exception for rates prescribed by the PBGC).

Predicted Effect of the Proposed Rule

The PBGC predicts the proposed rule, if enacted, would, among other things:  

• “Increase the amount of withdrawal liability that multiemployer plans assess and collect.”  Specifically, the PBGC estimates that the proposed rule would result in in increased withdrawal liability payments by employers of between $804 million and $2.98 billion over the next 20 years.

• Provide more certainty resulting in reduced arbitration and litigation costs.  The PBGC estimates between $500,000 and $1 million in savings annually.

Comment Period and Effective Date

The PBGC is seeking comments on the proposed rule, which must be submitted by November 14, 2022.⁸ The changes envisioned in the proposed rule would apply to the determination of withdrawal liability for employer withdrawals from multiemployer pension plans that occur on or after the effective date of any final rule, which the PBGC will issue after taking stakeholder comments into consideration.