For the first time since the Employee Retirement Income Security Act of 1974 (ERISA) introduced the concept of withdrawal liability, the Pension Benefit Guaranty Corporation (PBGC) has announced a proposed rule addressing the permissible interest rate assumptions for actuarial determinations of a withdrawing employer’s liability. The proposed rule would permit the most common methods for interest rate assumptions; it doesn’t address any other actuarial assumptions. Currently, PBGC is reviewing comments that were due December 13, 2022. PBGC’s agenda estimated a June 2023 timeline for releasing the final rule. Below are highlights from the proposed rule preamble section. A follow-up blog will highlight stakeholder reactions, open questions and potential impacts.
One-Minute Summary
- The proposed rule would permit the most used methods for interest rate assumptions. PBGC has proposed permitting the use of an interest rate anywhere in the spectrum from “settlement rates” alone to funding rates alone to determine withdrawal liability.
- Recent court decisions have required plans to reassess withdrawal liability using interest assumptions based on funding rates rather than settlement rates, or a blend using such rates, resulting in lower withdrawal liability assessments.
- PBGC intends the proposed rule to reduce litigation or eliminate plan expenses for legal disputes about the actuarial selection of the interest assumption.
- PBGC believes that more plans will use settlement rates, which would tend to increase withdrawal liability assessments. PBGC also believes that increasing plans’ withdrawal liability collection would positively affect PBGC’s multiemployer insurance program.
- “This proposed rule provides the clarity that many multiemployer plans need to determine an employer’s withdrawal liability and protect the retirement security of the workers and retirees covered by the plan,” said PBGC Director Gordon Hartogensis in a press release.
Key Terms and Background
A multiemployer pension plan is underfunded for withdrawal liability purposes if the actuarial value of vested benefits exceeds the value of plan assets. Under ERISA, an employer that withdraws from an underfunded multiemployer plan may be liable to the plan for withdrawal liability, which is the employer’s share of the plan’s unfunded vested benefits (UVBs) that the plan may have at the end of the plan year immediately preceding the plan year in which the employer withdraws. Withdrawal liability payments help to compensate plans for the loss of future contributions from the withdrawn employer if the vested benefits earned by its employees are not fully funded.
UVBs are the amount by which the present value of nonforfeitable benefits under the plan as of the valuation date exceeds the value of plan assets as of that date. The plan actuary determines the present value of all of the plan’s UVBs using actuarial assumptions and methods. The assumptions include the interest rate—sometimes called the discount rate—that is used to discount future benefit payments to their present value and the mortality tables used to determine the probability that each benefit payment will be made. Assuming a higher interest rate results in lower UVBs, whereas assuming a lower interest rate leads to higher UVBs.
Actuarial assumptions determine the interest assumption used to calculate an employer’s withdrawal liability. Funding rates are based on the expected average return on plan assets over the long term.
Settlement interest rates (terminology used throughout the proposed rule) are based on the market price of purchasing annuities from private insurers, such as by use of settlement interest rates prescribed by PBGC under ERISA Section 4044 for allocating a plan’s assets when the plan terminates. These are commonly called 4044 rates or plan termination rates.
PBGC’s Authority Under ERISA Section 4213
For ongoing plans, section 4213(a) of ERISA provides: “The corporation 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 corporation’s regulations for purposes of determining an employer’s withdrawal liability.” (emphasis added)
This proposed rule preamble states that because PBGC has not issued regulations under section 4213(a)(2), withdrawal liability determinations governed by section 4213(a) to date have been made under section 4213(a)(1).
Recent Disputes
Disputes between plans and employers about the value of UVBs are resolved through mandatory arbitration and then, if necessary, litigation. Court decisions have varied, and some have noted PBGC’s unused authority to issue a regulation for assumptions that may be used under ERISA section 4213(a)(2).
4044 Rates Would Be Encouraged
The proposed rule clarifies that it is reasonable to base the interest assumption used to calculate an employer’s withdrawal liability on the market price of purchasing annuities from private insurers (such as by use of settlement interest rates prescribed by PBGC under ERISA Section 4044) and would specifically permit the use of 4044 rates, either as a standalone assumption or combined with funding interest rate assumptions, to determine withdrawal liability.
Need for Regulation: Cost-Shifting in the PBGC Multiemployer Program
PBGC indicated that withdrawal liability represents a plan’s only opportunity to require a withdrawing employer to pay its allocated share of the unfunded liabilities. When a plan does not collect an adequate amount of withdrawal liability from a withdrawing employer, that burden is shifted to the remaining contributing employers in the plan. There is a higher likelihood that the plan will remain underfunded and, ultimately, there is an increased likelihood that it would not have resources to pay basic (PBGC-guaranteed) benefits. In that case, a plan may have to cut benefits to the PBGC guarantee level and apply to PBGC for financial assistance, which shifts costs to plan participants and to others in the multiemployer insurance system who fund PBGC via annual premiums.
Predicted Outcome
PBGC wrote that the proposed rule is needed to clarify that a plan actuary’s use of 4044 rates represents a valid approach to selecting an interest rate assumption to determine withdrawal liability in all circumstances. PBGC claimed that the proposed rule would reduce or eliminate the cost-shifting effects of impediments to actuaries’ use of 4044 rates:
- Several recent court decisions (and an unknown number of arbitration decisions) have required plans to reassess withdrawal liability using interest assumptions based on anticipated investment returns rather than 4044 rates (or a blend using such rates), resulting in lower withdrawal liability assessments
- The delay, expense and risk of adverse judgment involved with arbitration and litigation may provide an incentive for plans to settle withdrawal liability claims for less than the amount of withdrawal liability determined by the plan actuary, even in cases where the withdrawal liability dispute is not arbitrated or litigated
- Recent court decisions may deter actuaries from using 4044 rates (or a blend incorporating such rates) instead of interest rate assumptions based solely on anticipated plan investment returns.
Next Steps
Proposed rule comments were due December 13, 2022. PBGC requested comments on the entire proposal but particularly:
- Whether the final rule should restrict the allowable options to a narrower range of interest rates
- Whether the top of the range of permitted interest rates under section 4213(a)(2) should be lower than the typical funding interest rate assumption (which represents the expected return on a portfolio with a significant allocation to return-seeking assets)
- What the relationship should be, if any, between (a) the estimated date of plan insolvency, expected investment mix and/or funded ratio and (b) permitted withdrawal liability assumptions
- Whether the final rule should specify assumptions or methods other than interest assumptions.
PBGC is reviewing comments and drafting a final rule that will detail its response and decision to each comment. The final rule would have an effective date and/or applicability date for when employer withdrawals from multiemployer pension plans would require the finalized assumptions for determination of withdrawal liability. PBGC’s agenda estimated a June 2023 time line for releasing the final rule.
Jenny Gartman, CEBS
Manager, Reference/Research Services at the International Foundation
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