When dealing with withdrawal liability, employers frequently question how it is calculated and the answer is usually "by an actuary." One key to to understanding the actual calculation is to understand that it is an estimate of the value of the assets and liabilities of the pension plan from which you are withdrawing. But how the "estimate" is reached can be of some discussion and the 7th Circuit Court of Appeals recently determined that the actuary's best estimate is the one the plan should use.
In Chicago Truck Drivers Helpers and Warehouse Workers Union (Independent) Pension Fund v. CPC Logistics Inc., the Court was asked to a look at a calculation of withdrawal liability by a withdrawing employer. The arbitrator had ruled that the liability was overstated by about $1million, and the plan appealed that decision. The key to the case is that to figure out whether or not the plan met its annual minimum funding requirements, an actuary uses a “funding" rate assumption, which is an estimate of the interest rate for tax purposes. However, there is also another possible rate, called the "blended" rate that can be used for determining withdrawal liability. Depending on which is used, the withdrawal liability calculation can be very different.
The factors used when making a determination under the "blended" rate are different that the factors used to calculate a "funding" interest rate because of the difference between short and long-term assumptions and rates for annuities. If the short-term interest rates used in determining the "blended" rate exceed the long-term interest rates used to calculate the "funding" rate, an exiting employer's withdrawal liability assessment would be less. So the rate used could definitely have an impact on the withdrawal liability allocation. The trustees, based on advice from their actuary, should then adopt the rate that they believe best represents the plan's experience.
in this particular plan, the trustees of the plan instructed the actuary to use which ever rate would generate higher withdrawal liability allocations when making withdrawal liability computations, which happened to be the "funding" rate. The result of using the higher "funding" rate was that the employer had a withdrawal liability of almost $3.4million. The arbitrator determined that because the higher rate was used, the employer was charged almost $1million more than it should have. The Court agreed, finding that when making calculations, an actuary is obligated to use the "best estimate" of a plan's anticipated experience. Since the "blended" rate was, even according to the actuary, the correct interest rate to use, it had to be used even if it resulted in a lower withdrawal liability allocation.
This case shows how actuarial computations can vary based on certain assumptions and it explains the distinction between minimum funding computations and withdrawal liability computations. It also should serve as a reminder that, because the withdrawal liability rules do not provide a specific set of assumptions that must be used, the "best estimate" rule requires trustees and actuaries to give serious thought to their decisions related to what interest rates to apply when computing withdrawal liability. And it also gives withdrawing employers an additional piece to review when considering whether to challenge a withdrawal liability allocation.