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
The 6th Circuit held that the fund didn’t use its best estimate of the discount rate by using the Pension Benefit Guarantee Board’s rate of 2.27%, despite the fact that the fund estimated the rate of return on investments would be 7.75%. The employer claimed this method overestimated its withdrawal liability by about 10 million dollars. In any event, the fund’s actuary acknowledged his method of calculating withdrawal would overestimate withdrawal liability 77% to 95% of the time.
The court held that the actuary didn’t use his best estimate of the discount rate but stopped short of mandating use of a rate equivalent to the best estimate of rate of return. The result is that the fund will need to recalculate withdrawal liability, and the actuary can adjust where justified. But the court cautioned, “There is a limit to the kinds of adjustments that can be made.” This decision is in line with other appeals courts addressing this issue—see e.g. United Mine Workers of Am. 1974 Pension Plan v. Energy W. Mining Co., 39 F.4th 730 (D.C. Cir., 2022); Sofco Erectors, Inc. v. Trs. of Ohio Operating Eng’rs Pension Fund, 15 F.4th 407, 419 (6th Cir., 2021).
Maybe Not the End of the Story
The fund could seek en banc review (review of the decision by all of the judges on the 6th Circuit) or seek review by the U.S. Supreme Court. Both types of appeal are discretionary—the court must agree to take the appeal.
There’s also a related case pending at the 6th Circuit, Michigan Paving Company v. Operating Eng’rs Local 324 Pension Fund, Docket No. 24-12019, which could shed greater light on the fund’s obligations in calculating withdrawal liability. Ace Saginaw Paving Co. v. Operating Eng’rs Local 324 Pension Fund, Docket No. 24-1288/1305, ____ F.4th ____ (6th Cir., 2025).
Bottom Line
Under this decision, pension funds will need to carefully justify discount rate assumptions that deviate from the best estimate of rate of return. Employers in areas covered by the 6th Circuit (Michigan, Ohio, Kentucky, and Tennessee) that withdraw from underfunded, multiemployer pension plans are one step closer to less onerous withdrawal liability assessments.
Gary S. Fealk is an attorney with Bodman PLC in Troy, Michigan, and can be reached at gfealk@bodmanlaw.com.