Employers often challenge the interest rates that multiemployer plans use to calculate withdrawal liability.  Most of the time, they don’t win.  Chicago Truck Drivers, Helpers and Warehouse Workers Union (Independent) Pension Fund v CPC Logistics, Inc., 54 Emp. Ben. Cas. (BNA) 1041 (7th Cir., Aug. 20, 2012) was an exception.  The facts differed from the run-of-the-mill case but may recur elsewhere.

As often happens, the Chicago Truck Drivers plan used different interest rates for different purposes:  one for compliance with ERISA’s minimum funding requirements (the “funding interest assumption”), another for withdrawal liability calculations (the “blended rate”).  (The rates differed, because they looked at different time horizons.)  In 1997, responding to a recommendation by the plan actuary, the trustees decided to calculate withdrawal liability by using either the funding assumption or the blended rate, whichever was more favorable to the withdrawing employer.  In 2004, they changed their minds, and the plan reverted to using the blended rate alone.

Since then, the blended rate has been consistently lower than the funding interest assumption.  The upshot was a double impact on companies that withdrew from the plan during that period.  First, their liability was determined using a less favorable interest assumption.  Second, withdrawals before 2004 were assessed less than if the blended rate had been used, so that those employers’ withdrawal liability payments covered a smaller share of the plan’s unfunded vested benefits.

The interest rate for withdrawal liability purposes is supposed to be based on “the actuary’s best estimate of anticipated experience under the plan,” ERISA, §4213(a)(1).  In this case, it was obvious to the 7th Circuit (affirming a district court affirmance of an arbitrator’s award) that, whatever the trustees’ motivations in changing interest assumptions, utilizing the actuary’s “best estimate” was not first and foremost.

The plan’s actuarial firm is one of the most active in the multiemployer arena and, it appears, made similar interest rate recommendations to many other plans.  Hence, it is quite possible that more cases like this one will arise.  If so, one facet that was not emphasized by the 7th Circuit is likely to attract further attention.

The actuary devised the “blended rate” for the specific purpose of providing a “best estimate of anticipated experience under the plan” in light of the circumstances surrounding multiemployer plan withdrawals.  The plan was thus at fault not for using the blended rate to assess CPC Logistics’ liability but for using a higher rate (generating smaller liabilities) for withdrawals in earlier years.  Implicitly, the court held that the use of the “best estimate” rate today can be precluded because other employers were assessed too little in the past.  From one point of view, that is an eminently equitable result.  It does, however, leave plans in the position of having to perpetuate unreasonable decisions forever.