On August 20, 2012, in the case of Chicago Truck Drivers Helpers and Warehouse Workers Union (Independent) Pension Fund v. CPC Logistics Inc., No. 11-3034, the Court of Appeals for the Seventh Circuit affirmed an arbitrator’s decision that the pension plan trustees over-assessed an employer’s withdrawal liability by $1,093,000.
In February 2005, CPC Logistics Inc. completely withdrew from the Chicago Truck Drivers, Helpers and Warehouse Workers Union (Independent) Pension Fund, an ERISA-governed multiemployer defined benefit pension plan. Despite the withdrawal, the plan remained liable to the employees who have vested pension rights, though CPC and other completely withdrawing employers no longer contribute additional funds to the plan. ERISA contains provisions, 29 U.S.C. § 1381 et seq., that assess the employer with an exit liability equal to its pro rata share of any pension plan funding shortfall. The shortfall (“unfunded vested benefits”) is the difference between the present value of the plan’s assets and the present value of its future obligations to employees covered by the plan. 29 U.S .C. §§ 1381, 1391.
In this case, the plan actuary computed CPC’s withdrawal liability because the plan was underfunded at the time of the withdrawal. The actuary also had the separate task of making the annual determination of the plan’s minimum funding obligations. Both calculations depended on the interest rate used to compute the present value of the plan’s future obligations. In making these calculations, however, the actuary used different formulas. One formula was based upon a blended interest rate, while the other formula took into consideration different assumptions.
CPC contested the plan’s determination that it owed $3.4 million in withdrawal liability. CPC and the plan arbitrated the withdrawal liability dispute under ERISA section 4221(a)(1). According to the Seventh Circuit on review of the arbitrator’s decision in favor of CPC, the effect of the actuary’s two formulas fluctuated from time to time, with each producing a higher interest rate depending on economic conditions at different times.
The Court questioned the trustees’ decision directing the actuary to use a formula that produced the higher interest rate for purposes of determining the withdrawal liability, because ERISA requires that the computation of withdrawal liability be based on the actuary’s best estimate and reasonable assumptions. The Court also found it significant that the plan trustees directed the actuary to use the lower interest rate (producing higher withdrawal liability), beginning in 2004, in an apparent attempt to “extract higher exit prices from employers who withdrew” from the plan. According to the Court, the lower interest rate “caus[ed] the plan’s unfunded vested benefits to leap from $67 million to $117.2 million that year, which “increased CPC’s withdrawal liability by $1,093,000 from the amount it would have owed if the plan used same rate throughout the period for CPC’s withdrawal liability calculation.
Affirming the arbitrator’s decision, the Court determined that the “arbitrator therefore sensibly concluded” that the plan overstated the CPC withdrawal liability. The Court stated: “An actuarial determination that violates ERISA by not being based on the actuary’s best estimate is unreasonable, hence reversible by the arbitrator.”