Recent court decisions have called into question the use of an interest rate assumption used to determine withdrawal liability that is not based on anticipated investment returns. The direct and indirect results of these decisions are lower withdrawal liability payments, either due to lower withdrawal liability assessments or settlements for less than the full amount given the risk of litigation. Receiving lower withdrawal liability payments from a withdrawn employer shifts liabilities to remaining employers and puts the plan participants at risk in the event the plan is not able to pay full accrued benefits. To help reduce or eliminate this cost-shifting, the PBGC is exercising its authority to prescribe actuarial assumptions for determining withdrawal liability.

According to PBGC Director Gordon Hartogensis, the “proposed rule provides the clarity that many multiemployer plans need to determine an employer’s withdrawal liability and [to] protect the retirement security of the workers and retirees covered by the plan.” The PBGC expects that the proposed rule will have an overall positive effect on the multiemployer system and the PBGC’s multiemployer program.

Range of acceptable interest rates and other assumptions

Under ERISA, a withdrawn employer may be assessed withdrawal liability, which is the employer’s allocable share of the plan’s unfunded vested benefits, determined on the basis of:

1. Reasonable actuarial assumptions and methods, reflecting the experience of the plan and reasonable expectations, which, in combination, offer the actuary’s best estimate of experience under the plan; or
2. Actuarial assumptions and methods as set forth in PBGC regulations

Until now, the PBGC had not issued such regulations.

The proposed rule provides acceptable interest rates that range from PBGC annuity rates (the rates set forth in existing PBGC regulations, reflecting the market price of purchasing annuities from private insurers) to the rate selected by the plan’s actuary for ERISA minimum funding purposes.

In general, any approach that blends PBGC annuity rates and the minimum funding rates, such as the Segal Blend, falls within the range and is acceptable.

Other assumptions also are required to calculate withdrawal liability. Under the proposed rule, methods and assumptions (other than the interest rate assumption) must still be reasonable (taking into account the experience of the plan and expectations) and, in combination, reflect the actuary’s best estimate of anticipated experience under the plan.

Comments requested

Comments on the proposed rule are due to the PBGC no later than November 14, 2022. The PBGC specifically requested comments on whether the final rule should restrict acceptable interest rates to a narrower range or to specific methodologies for determining rates. It also requested comments on whether the final rule should specify other assumptions or methods in addition to the interest rate and invites comments on other issues related to withdrawal liability assumptions.

Effective date

The proposed rule would apply to a determination of withdrawal liability for withdrawals that occur on or after the effective date of the final rule. However, “the proposed rule does not preclude the use of an interest rate assumption described [in the proposed rule] to determine unfunded vested benefits before the effective date of the final rule.”