Noting that statements from attorneys in the case made no allowance for the court lacking specialized knowledge in federal pension law, Circuit Judge Richard Posner, writing for the 7th U.S. Circuit Court of Appeals, said, “We have applied ourselves to tugging the hide off this lion in search of the donkey underneath. We think we have found the donkey.” The court concluded that an actuarial determination that violates the Employee Retirement Income Security Act (ERISA) by not being based on the actuary’s best estimate is unreasonable, hence reversible by the arbitrator hearing the employer’s dispute of its withdrawal rate.
The actuary retained by the plan offered the trustees of the plan a choice of calculations for the employer’s withdrawal liability, and the court found the trustees’ decision questionable.
The court noted that during the period relevant to the case, ERISA required the plan actuary, in calculating interest rates as in making other actuarial determinations, to use assumptions which, “in the aggregate, are reasonable” and “which, in combination, offer the actuary’s best estimate of anticipated experience under the plan.” These requirements apply to determining both adequacy of funding to avoid a tax penalty and withdrawal liability.
According to the court opinion, despite the identical statutory text for both calculations, the actuary retained by the Chicago Truck Drivers, Helpers and Warehouse Workers Union (Independent) Pension Fund, The Segal Company, used different formulas to arrive at its “best estimate” of the two rates. Its best estimates of the interest rates for tax and withdrawal-liability purposes were called the “funding interest assumption” and the “Segal Blended Rate,” respectively. The different methods yielded different interest rates.
Posner cited language in the Supreme Court’s decision in Concrete Pipe & Products of California, Inc. v. Construction Laborers Pension Trust, which could be read to suggest that having two different interest-rate assumptions – one for withdrawal liability and one for avoiding the tax penalty – might make a plan vulnerable to claims that either or both were “unreasonable.” While the danger was remote and the high court had indicated that “supplemental” assumptions that might cause the rates to diverge were permissible, Segal was worried, and at its suggestion the plan’s trustees directed Segal to calculate both the Segal Blended Rate and the funding interest assumption then use the higher of the two, which would generate a lower withdrawal liability each year.
Since Segal maintains, and the plan does not dispute, that the Segal Blended Rate, not the funding interest assumption, was its best estimate of the right interest rate to use to calculate withdrawal liability, the trustees’ decision was questionable, the appellate court said. The court speculated that the trustees directed Segal to change the rates in certain years to calculate the plan’s unfunded vested benefit pools for withdrawal-liability purposes based on the plan’s priorities, changing from attracting more employers with the prospect of low withdrawal liability (by assuming a high interest rate and therefore a rapid growth in the fund’s assets) to extracting higher exit prices from employers who withdrew (by assuming a low interest rate and in consequence a sluggish rate of asset growth and so a larger shortfall).
The 7th Circuit ruled that the arbitrator sensibly concluded that the pools had not been calculated “on the basis of . . . actuarial assumptions . . . which, in combination, offer the actuary’s best estimate of anticipated experience under the plan” in years when the funding rate assumption was used in lieu of a lower Segal Blended Rate.
The opinion in Chicago Truck Drivers, Helpers and Warehouse Workers Union (Independent) Pension Fund v. CPC Logistics is here.