Articles | October 13, 2021

What Is the Segal Blend?

The Segal Blend is an approach to valuing a multiemployer pension fund’s unfunded vested benefits for withdrawal liability purposes. As the name suggests, the Segal Blend was initially developed by Segal’s actuaries and combines the liabilities calculated using two interest rate assumptions.

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What's covered

This article discusses:

  • The origins of the Segal Blend
  • The purpose of withdrawal liability
  • What’s blended in Segal Blend
  • The impact of the Segal Blend
  • Arbitration and litigation about the Segal Blend
  • The future for the Segal Blend

When did the Segal Blend come about?

In 1980, the Multiemployer Pension Plan Amendments Act (MPPAA) amended ERISA to address issues facing multiemployer plans. MPPAA introduced the concept of withdrawal liability for multiemployer defined benefit (DB) plans. The Segal Blend was developed after the passage of MPPAA to recognize the complexities of multiemployer plan dynamics when a contributing employer withdraws from the plan.

If an employer contributing to a multiemployer DB pension plan withdraws from the plan, any of its employees who are vested in the plan are still entitled to benefits under the plan. MPPAA therefore requires that employer make additional payments to cover its share of the plan’s unfunded vested benefits (i.e., it requires the employer to cover the benefits that the employer promised to its employees). Withdrawal liability payments provide protection for the plan participants by funding promised benefits. Withdrawal liability assessments reflect that the cost of and risks to the plan will be borne by the remaining employers and not the withdrawing employer.

MPPAA requires the Enrolled Actuary for the plan to calculate the unfunded vested liability for withdrawal liability purposes based on the actuary’s “best estimate” assumptions. A withdrawing employer may challenge the assumptions selected by the Actuary, but the burden of proof falls to the employer to demonstrate the assumptions selected by the Actuary were unreasonable. If there is a dispute between a plan and an employer over a withdrawal liability determination, it generally must first go to arbitration prior to being heard by a court.

As a leader in multiemployer retirement consulting for decades, we work with hundreds of multiemployer plans for which the Enrolled Actuary uses the Segal Blend. We also work with numerous multiemployer plans for which the Enrolled Actuary uses other methods in determining their “best estimate” assumptions. And use of the Segal Blend or similar methodologies is not unique to Segal — many Enrolled Actuaries who are not employed by Segal have also used some variation of the Segal Blend for withdrawal liability purposes.

 

What's the purpose of withdrawal liability?

The purpose of withdrawal liability is to protect the financial integrity of multiemployer plans, the plan’s participants and remaining employers. Withdrawal liability is generally assessed when an employer stops contributing to the plan, leaving the remaining employers with all ongoing risks and funding obligations — including the obligation to pay benefits to the withdrawing employer’s employees. Since the employer will cease to have any ongoing obligations to the plan and will not be involved in the future of the plan, the payment of withdrawal liability has been traditionally viewed as being akin to a final settlement between the employer and the plan.

Boards of trustees are required to assess and collect withdrawal liabilities. Enrolled Actuaries who use the Segal Blend do so because it reflects their best estimate of future experience under the plan as a final settlement between the withdrawing employer and the plan.

What’s blended in the Segal Blend?

The Segal Blend involves two separate calculations of the plan’s vested benefit liability. The results of those calculations are then blended together to form the basis for determining an employer’s withdrawal liability.

The first liability calculation recognizes that the withdrawing employer is entering into what is essentially a final settlement of its obligations (e.g., the benefits it promised its employees) and is transferring all ongoing risk to the remaining stakeholders (e.g., the plan required to pay those benefits). Using the settlement framework, this first liability calculation is intended to reflect what the employer would pay if it purchased annuities at current market rates. The Segal Blend uses rates published quarterly by the PBGC based on its survey of insurance company annuity purchase rates for this purpose.

The second liability calculation uses the actuary’s assumption of future investment returns selected for purposes of determining the plan’s minimum funding requirement under ERISA. This approach is used to the extent that liabilities are not currently fully funded under the first calculation, to recognize that the withdrawing employer is allowed to pay the unfunded portion of its liability over a period of up to 20 years.

A simple example follows.

 

Mechanics of the Segal Blend  

 

Vested benefits on funding basis (using assumptions for determining minimum funding of the plan)

$90

 

Market value of assets

$80

÷

Vested benefits at market value (using PBGC assumptions)

$100

=

Funded percentage on market basis

80%

 

80% of vested benefits at market value

80% of $100 = $80

+

20% of vested benefits on a funding basis

20% of $90 = $18

=

Vested benefits for withdrawal liability

$98

Market value of assets

$80

=

Unfunded vested benefits for withdrawal liability

$18

 

What’s the impact of the Segal Blend?

The rationale for using the Segal Blend is based on an understanding of how employer withdrawals affect multiemployer plans, and the Enrolled Actuary’s best estimate of future plan experience. Over the years, the Segal Blend has resulted in both lower and higher withdrawal liabilities compared to a withdrawal liability determined using the assumptions selected for minimum funding purposes.

Following the adoption of MPPAA in 1980, market (short-term) interest rates (and therefore PBGC rates) were much higher than the long-term rates that actuaries were generally selecting for minimum funding valuations. As a result of this relationship, the Segal Blend yielded lower withdrawal liability amounts.

More recently, historically low interest rates in the financial markets are below the return assumptions selected by actuaries for minimum funding purposes. The Blend methodology has generally yielded higher withdrawal liability amounts than a calculation using only funding assumptions.

How do arbitrators and courts view the Segal Blend?

Challenging the Segal Blend and withdrawal liability generally is not new, but arbitrators and courts have long accepted the use of the Segal Blend for calculating withdrawal liability. We are not aware of any arbitration or court decision that rejected use of the Segal Blend for withdrawal liability purposes for more than 35 years following the inception of withdrawal liability. 

Prior to 2018

In 1983, only three years after MPPAA was enacted, an excerpt from the arbitrator’s decision in Sotheby’s v. Local 814 PF explains:

Segal has earned its reputation by devotion to its discipline as evidenced by the scholarship and training of its senior actuaries; its use of reviewing and steering committees; and, its requirement that its policies and procedures be uniformly implemented, subject to the unique experience of each fund, thereby avoiding any assertion that its methodology was “result-oriented” or, in other respects, arbitrary or unreasonable.

The making of actuarial assumptions, by law, requires an actuary, for withdrawal liability purposes, to use his best estimate of anticipated experience. The Arbitrator is satisfied that, in adopting the blended rate, Segal fulfilled its statutory mandate… Segal manifested an adherence to its obligation to constantly review the components and underlying data of its assumptions and to make modifications to them as required ...

In 1992, the U.S. Supreme Court decision in Concrete Pipe & Products of Cal., Inc. v. Construction Laborers Pension Trust for Southern Cal upheld the constitutionality of withdrawal liability. While often cited by opponents of the Segal Blend as prohibiting its use, the Supreme Court in fact upheld the calculation of employer withdrawal liability by the Enrolled Actuary using the Segal Blend.

Arbitration and Litigation Supporting the Segal Blend, 1983–2013  

1983

Perkins Trucking Co., Inc. v. Local 807 Labor-Management Pension Fund

1984

Foodtown Stores, Inc. v. United Food and Commercial Workers-Industry Pension Fund

1984

Classic Coal Corp v. UMW 1950 and 1974 Pension Plans

1984

Ells v. Construction Laborers Pension Trust of Southern California

1984

Joy v. IAM

1985

Bassett Construction Company v. Centennial State Carpenters Pension Trust Fund

1986

East St. Louis Castings Co. v. M.I.R.A. Molders and Allied Workers Pension Fund

1987

J.L. Denio v. Operating Engineers Pension Trust

1992

Trustees of the Plumbers & Pipefitters Nat'l Pension Fund v. MAR-LEN, Inc.

1994

Sotheby's Inc. v. Local 814, IBT Pension Fund*

2007

Widoff’s Modern Bakery v. Bakery and Confectionery Union and Industry International Pension Fund

2008

Embassy Industries v. UAW 365

2013

Block Communications, Inc. and Buckeye Telesystems, Inc. v. Central States

* Rejected strict interpretation of Concrete Pipe

 

Since 2018

Unanimous judicial support for the Segal Blend changed in 2018 when a district court rejected use of the Segal Blend in New York Times Co. v. the Newspaper and Mail Deliverers’-Publishers’ Pension Fund. The case concerned the New York Times’ withdrawal from a multiemployer pension fund, which had been upheld by an arbitrator. The plan appealed, but the case was settled before the appellate court reached a decision.

However, shortly after that decision was handed down, another district court upheld use of the Segal Blend. That case was Manhattan Ford Lincoln, Inc. v. UAW Local 259 Pension Fund. The decision noted:

Minimum funding and withdrawal liability are different concepts under ERISA with different, although related, policy concerns. … Funding is an ongoing process, subject to adjustment for an employer that is remaining in the plan. … Withdrawal liability, however, is calculated once, as of the time of withdrawal. Should the unexpected occur after that employer’s departure, the burden may unfairly fall on other plan employers… The risk-transfer and settlement models of withdrawal liability recognize a more complicated reality than the one embodied in minimum funding levels.

In May 2020, another district court ruled, in Sofco Erectors Inc. v. Trustees of the Ohio Operating Engineers Pension Fund, that “Although not unlawful to use different rates for funding and withdrawal liability pursuant to Concrete Pipe, there are legal grounds to find that the Fund’s use of the Segal Blend in this instance was erroneous.” However, the court did not clarify the legal grounds that led to its conclusion to overturn the arbitration award supporting the Blend. The plan appealed the decision to the Sixth Circuit Court of Appeals.

Also in May 2020, a district court ruled in United Mine Workers of America 1974 Pension Plan v. Energy West Mining Company. Although the plan’s actuary did not use the Segal Blend, the court refuted the logic in the New York Times decision, noting, “nothing in ERISA’s text or in Concrete Pipe requires that the minimum-funding rate and withdrawal-liability discount rate be the same.” The company has appealed the decision to the federal appellate court for the District of Columbia. A decision from that court is pending.

In addition, in July 2020, an arbitrator upheld use of the Segal Blend. In Interboro Fuel Corp v. Local 553 Pension Fund, the arbitrator stated:

Just because in one isolated case, which was either wrongly decided, as [the Fund] urges, or was fact specific to the parties, that is, the New York Times case, does not mean every withdrawing employer may cite that case as a basis to overturn the Segal methodology... All agree that there is no holding that renders [the Segal Blend] invalid or patently unreasonable. Even the New York Times case declared that to be so.

In September 2021, the Sixth Circuit Court of Appeals ruled in the Sofco case that the Segal Blend did not reflect the Fund’s anticipated experience for purposes of calculating withdrawal liability. While recognizing that the use of the Segal Blend represented a “perhaps… a laudable policy proposal,” the Court rejected its use based on a very narrow view of the meaning of the statutory language “anticipated future experience of the plan.” The court’s narrow view precludes the ability of an actuary to follow usual Actuarial Standards of Practice, which prompts the actuary to consider the purpose of the measurement. The court is the only Circuit Court to reach this conclusion. Notably, the court decided not to rule on whether actuaries must always use the same actuarial assumptions for purposes of both minimum funding and withdrawal liability.

What’s the future for the Segal Blend?

While Segal continues to review the Sofco decision, it appears to be settled law for plans in the Sixth Circuit (Michigan, Ohio, Tennessee and Kentucky), but plans should seek advice from their legal counsel on this issue. Actuaries serving plans in other jurisdictions may continue to use the Segal Blend.

The court noted in the Sofco decision that the PBGC could displace the court’s holding in regulations issued by the agency. As stated in the PBGC’s Interim Final Rule on the American Rescue Plan Act (issued before the Sofco decision), and as reflected in recent public statements made after the Sofco decision, the PBGC intends to exercise its authority to regulate assumptions used for withdrawal liability. We will closely monitor PBGC action on this issue in anticipation of proposed regulations.

Segal’s history with multiemployer plans runs deep.

Learn about our work with multiemployer plans.

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This page is for informational purposes only and does not constitute legal, tax or investment advice. You are encouraged to discuss the issues raised here with your legal, tax and other advisors before determining how the issues apply to your specific situations.

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