Proposed Interest Rate Assumptions for Determining Employer Withdrawal Liability (Part Two)

Jenny Gartman, CEBSMarch 14, 2023March 14, 2023

A new rule proposed by the Pension Benefit Guaranty Corporation (PBGC) would increase the certainty of withdrawal liability determinations for multiemployer benefit plans and likely help prevent withdrawal liability disputes from going to arbitration and litigation, PBGC officials say. The proposed permissible interest rate assumptions are close to current practice, actuarial firms say.

This is the first time since the Employee Retirement Income Security Act of 1974 (ERISA) introduced the concept of withdrawal liability that PBGC has proposed a 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. Part one of this blog post highlighted three methods under the proposed rule, defined key terms and covered PBGC’s reasoning for the rulemaking. This follow-up blog will highlight PBGC’s estimates of the rule’s projected impact on the multiemployer system and potential considerations from commenters.

PBGC’s Estimated Impact

Highlights of the estimated impact of the proposed rule included the following:

Increased withdrawal liability payments: PBGC estimates that, in the 20 years following the final rule’s effective date, there will be a nominal increase in cumulative withdrawal liability payments ranging between $804 million and $2.98 billion.
Employer actions: While PBGC expects that the proposed rule will deter employer withdrawals, PBGC does not model any change to the rate of employer withdrawals or decrease in contributions due to improved plan funding attributable to these changes because doing so would be too speculative.
Cost savings: Though costs will vary greatly from plan to plan, PBGC estimates that the costs of a withdrawal liability arbitration—measuring from a request for plan sponsor review of a withdrawal liability determination through the end of arbitration—range from $82,500 to $222,000. For lengthy litigation, costs can exceed $1 million. Assuming that some arbitrations and litigation would be avoided entirely, and others would be less complex because they would not include disputes over interest assumptions, PBGC estimates that this proposed rule would result in an annual savings of $500,000 to $1 million, split evenly between plans and employers.

Potential Considerations

PBGC held a comment period on the proposed rule that closed December 13, 2022. PBGC received 28 comments. There is a wide range of opinions on how the proposal would impact multiemployer funds, participants and employers. There was substantial agreement that PBGC identified the range of interest rates that multiemployer pension actuaries currently use. Following is a high-level look at comments submitted to PBGC on the impact of the proposed rule.

Commenters addressed the following topics.

Each multiemployer plan has unique circumstances and varying demographics (covered population, industry, geographic location, etc.).
Whether the plan sponsor or plan actuary selects the interest rate assumption under the proposed rule and whether that might be considered a fiduciary function.
Whether ERISA Section 4044 interest rates, which PBGC prescribes for mass withdrawal, are appropriate for an ongoing plan in determining an employer’s withdrawal liability.
Currently, in the proposed permissible range, the minimum funding interest rate is at the high end while 4044 rates are at the low end of the range. Some commenters said this relationship has been reversed in the past, and that could happen again in the future.
Whether, within the range, to require that actuarial assumptions be reasonable and/or consider the actuary’s best estimate of the plan’s anticipated experience.
The effective date of the final rule (retroactive or prospective application).

Commenters asked PBGC to clarify points such as:

Multiemployer plans nearing insolvency, such as those in critical and declining status
Administrative expense assumptions
Withdrawal liability payment schedules or the 20-year cap that applies on installment payments.

PBGC Review and Expected Release

PBGC is working on a final rule that will lay out the input from commenters and must base its reasoning or conclusions on the rulemaking record. It is estimated that a final rule will be published later this year. It remains to be seen how this rulemaking will impact ongoing disputes regarding withdrawal liability assessments and whether the final rule will face legal challenges.