By Dannae Delano and Israel Goldowitz
On July 8, 2022, the Pension Benefit Guaranty Corporation (“PBGC”) issued its Final Rule (the “Final Rule”) implementing the American Rescue Plan Act of 2021 (“ARPA”) provisions for special financial assistance (“SFA”) to failing multiemployer plans. In response to comments, the Final Rule addresses several shortcomings in an Interim Final Rule (“Interim Rule”) issued in July 2021.
As we’ve previously reported, more than 200 multiemployer plans may qualify for SFA, including some of the largest plans. Among the issues are the treatment of SFA as a plan asset and the valuation of benefit liabilities for withdrawal liability purposes. We address some of the highlights below.
There is a short comment period – ending August 8, 2022 – on one important aspect of the Final Rule.
Withdrawal liability valuation assumptions continue to generate controversy outside the SFA context, as we’ve also reported. July 8 also saw an appellate decision on the “best estimate” standard, with another appeal pending. We also address those developments.
Conditions on Special Financial Assistance
Under ARPA, PBGC may impose reasonable conditions on plans that receive SFA. Current PBGC conditions on receiving SFA include conditions relating to benefit increases, investments, valuation assumptions, and withdrawal liability.
The Interim Rule conditioned SFA on there being no benefit increase attributable to pre-SFA service or other events and permitted future service increases only if the plan actuary certified that they would be covered by increased contributions.
Commenters said that benefit increases based on pre-SFA service (including benefit restorations) could provide active participants with an incentive to remain in the plan. In response, the Final Rule permits, with PBGC approval, benefit increases for both pre-and post-SFA service, starting 10 years after receipt of SFA. The plan must demonstrate that the benefit increase will not lead to plan insolvency.
Investments and SFA Valuation Assumptions
The Interim Rule provided that the amount of required SFA was to be determined by discounting benefit liabilities using assumptions for zone status certification for endangered or critical status plans. Those certifications are to be determined by the plan’s actuary based on funding assumptions set forth in most recent Form 5500 Schedule MB or in the actuarial valuation for the preceding year but were limited to the third segment rate for single-employer plan funding, without rate stabilization, plus 200 basis points. The limit was approximately 5.5% in 2021.
At the same time, the Interim Rule limited investment of SFA to investment-grade bonds. The expected return was about 2% in 2021. That mismatch, commenters noted, would result in SFA being exhausted well before the 30 years Congress intended.
After further review of the statute and additional modeling, PBGC has now allowed investment of up to one third of SFA in equities or equity mutual funds or collective investment trusts. The agency also provided for calculation of required SFA by discounting benefit liabilities using the third segment rate plus 200 basis points for assets on hand and the full yield curve plus 67 basis points for SFA, in either case without rate stabilization.
In the Interim Rule, PBGC considered but rejected disregarding SFA in the calculation of withdrawal liability. PBGC explained that such a rule would make it more “administratively complex” for plans to determine the effect of employer withdrawals on their SFA requests.
Commenters said that treating SFA as a plan asset for withdrawal liability purposes would create perverse incentives for employers to withdraw, even though under the Interim Rule withdrawal liability was to be calculated using conservative mass withdrawal assumptions.
In response, the Final Rule provides (subject to a comment period ending August 8, 2022) that SFA is treated as a plan asset for withdrawal liability purposes on a phased-in basis, with SFA multiplied by a fraction whose numerator is the number of plan years starting with the “determination year” (the plan year before withdrawal) and ending with the SFA’s projected “exhaustion year” (on the assumption that SFA is spent before other plan assets) and whose denominator is the number of years starting with the SFA measurement year and ending with the exhaustion year (extended by the number of years by which the payment year lags the measurement year).
As under the Interim Rule, benefits must be valued using mass withdrawal assumptions for withdrawal liability purposes. Those assumptions are based on annuity purchase prices and result in a more conservative valuation than investment-grade bond yields. As under the Interim Rule, those assumptions are imposed for a minimum of ten years or the end of the year of SFA exhaustion, though the Final Rule uses the projected exhaustion year, not the actual exhaustion year.
We anticipate that employers will challenge the withdrawal liability provisions of the Final Rule in arbitration or before the courts. In response, the PBGC will likely argue that SFA is meant to preserve plan benefits until 2051, not to subsidize employers, and that Congress gave PBGC an express delegation of rulemaking authority to set conditions on SFA in addition to PBGC’s general delegation of rulemaking authority.
To be sure, Congress considered adopting a provision that SFA has no effect on withdrawal liability for 15 years, while ARPA is silent on this point (as a result of a Senate parliamentary ruling). At the same time, ARPA provides that SFA does not count as an asset for minimum funding purposes.
It therefore may be argued that Congress required that SFA be treated as a plan asset in full and that PBGC is powerless to address the question. Given the express rulemaking authority, however, the Final Rule may survive both traditional Chevron review and “major questions” review.
Withdrawal Liability Assumptions for non-SFA Plans
As anticipated in the preamble to the Interim Rule, PBGC’s June 2022 Semi-Annual Regulatory Agenda includes a rulemaking project on actuarial assumptions for withdrawal liability purposes. PBGC has always had that authority but has never before exercised it.
Many plans use their funding valuation rates or a blend of termination and funding rates to determine withdrawal liability. The funding rate is often 6% or higher, while termination rates are currently 2.8-2.9%. A difference of 300 basis points can swing the value of pension liabilities by 30% or more.
Withdrawal liability assumptions should be of particular interest to employers and prospective employers, including acquirers, and to investors and lenders. The most recent development is the D.C. Circuit’s decision in United Mine Workers of America 1974 Pension Plan v. Energy West Mining Co. (July 8, 2022).
The D.C. Circuit overturned an arbitration award in favor of the plan, holding that the plan’s assumptions failed to anticipate actual experience by using historical returns, and therefore could not be considered “reasonable.” The plan actuary had used a termination interest assumption of 2.7-2.8% while using a 7.5% assumption for funding purposes. The court emphasized that, under ERISA, such valuation assumptions must not only be reasonable but must represent the actuary’s “best estimate of anticipated experience under the plan.”
Some previous decisions had emphasized the procedural aspect of this standard—that the assumptions must be the actuary’s and must not be imposed by the plan’s trustees. The D.C. Circuit confirmed that it is also substantive – that the assumptions must be based on the plan’s historical and expected returns. The Court pointed out that Congress knows how to say that plan experience is not relevant (as it did in the full funding limitation) and that whatever the Actuarial Standards of Practice may say about the issue, those standards do not have the force of law.
The D.C. Circuit thus lines up, in principle, with the Sixth Circuit, which in Sofco Erectors v. Trustees of Ohio Operating Engineers Pension Fund (2021) held that a blend of PBGC and funding rates could not represent the actuary’s best estimate, as it considered yields on assets the plan did not and would never hold. Another “best estimate” decision, in GCIU-Employer Retirement Fund v. MNG Enterprises, is now on appeal to the Ninth Circuit. The Seventh Circuit’s decision in Chicago Truck Drivers, Helpers & Warehouse Workers Union (Indep.) Pension Fund v. CPC Logistics, 698 F.3d 346 (7th Cir. 2010), is opposed to these decisions to some extent, as it overturned an actuary’s allowing plan trustees to choose a blended interest rate but not the blended rate approach itself.
There may be a cert-worthy issue, even before the Ninth Circuit rules. And the PBGC is certainly following the case law as it develops the specifications for its proposed valuation rule.
As a result of the Final Rule, employers participating in troubled multiemployer plans have several new factors to consider when evaluating their financial positions and business planning. Conditions on Special Financial Assistance may affect decisions about continuing in the plan or withdrawing. Employers may rely on the recent court decisions to attack a plan’s withdrawal liability interest rate assumptions. These issues may also affect the structure and pricing of M&A transactions for both sellers and buyers, for borrowers and lenders, and for investors generally.
Such decisions are best approached with the assistance of expert counsel and other professionals. If you have questions in these areas, please contact Israel Goldowitz of our Washington, DC office, Dannae Delano of our St. Louis, MO office, or your regular Wagner Law Group attorney.