Segal Blend Litigation, Part Two: New Jersey District Court Holds That Use of Segal Blend Did Not Violate MPPAA
As our earlier article reported, Judge Robert W. Sweet of the U.S. District Court for the Southern District of New York had recently held that a multiemployer pension fund’s use of the “Segal Blend” to calculate a withdrawn employer’s withdrawal liability violated the provisions of the Employee Retirement Income Security Act (“ERISA”), as amended by the Multiemployer Pension Plan Amendments Act (“MPPAA.”) The “Segal Blend” is a proprietary method of valuing a plan’s unfunded vested benefits to calculate withdrawal liability that was developed by The Segal Company, one of the preeminent actuarial firms servicing multiemployer pension plans. By blending the plan’s investment-return interest rate assumption with the lower risk-free rates published by the Pension Benefit Guaranty Corporation (called “PBGC Rates”), the Segal Blend generally results in greater withdrawal liability assessments against withdrawn employers. Judge Sweet’s decision (The New York Times Co. v. Newspapers & Mail Deliverers’-Publishers’ Pension Fund, No. 1:17-cv-06178-RWS (S.D.N.Y. Mar. 26, 2018)) has been appealed to the United States Circuit Court of Appeals for the Second Circuit.
On July 3, however, Judge Kevin McNulty of the United States District Court for New Jersey held that using the Segal Blend by the UAW Local 259 Pension Fund did not violate MPPAA. The decision (Manhattan Ford Lincoln, Inc. v. UAW Local 259 Pension Fund, No. 2:17-cv-05076-KM-MAH (DNJ July 3, 2018)) creates a split within the two district courts to have considered the issue, and opens the door to a possible Circuit Court split (pending the resolution of the New York Times appeal by the Second Circuit and the potential appeal of the Manhattan Ford decision to the Third Circuit.) A Supreme Court decision on this issue would then become a real possibility.
Both Judge Sweet and Judge McNulty looked at the same two potential bases for disallowing the use of the Segal Blend. Both judges initially looked at whether using different interest rates for different purposes (namely funding and withdrawal liability) is always impermissible under Concrete Pipe & Prods. of Cal., Inc. v. Constr. Laborers Pension Tr. for S. Cal., 508 US 602 (1993), in which the Supreme Court discussed (albeit in dicta) “the necessity” of a Fund actuary to apply “the same assumptions and methods in more than one context” while highlighting the critical interest rate assumption.
The significance of this issue is readily demonstrated by the fact that in both cases, using the 7.5% funding interest rate assumption would have generated zero withdrawal liability for each employer. Using the Segal Blend, however, generated withdrawal liability amounts of approximately $25 million (in The New York Times) and $2.5 million (in Manhattan Ford.)
Similar to Judge Sweet, Judge McNulty held that “Concrete Pipe does not impose a statutory bar” on the use of a different interest rate assumption for withdrawal liability than that used for funding purposes, concluding that Concrete Pipe “leaves open the possibility of separate actuarial assumptions being permissibly applied to funding and withdrawal liability.”
Where Judge Sweet and Judge McNulty diverged, however, was in determining whether using the Segal Blend for withdrawal liability purposes represented the actuary’s “best estimate of estimated experience under the plan” (as required by Section 4213(a)(1) of ERISA.) Judge Sweet found compelling the plan actuary’s testimony that a 7.5% interest assumption (the rate used for funding) was her “best estimate of how the Pension Fund’s assets…will on average perform over the long term.” Judge Sweet concluded that if 7.5% represents the actuary’s “best estimate,” it “strains reason to see how the Segal Blend” (which blends that 7.5% rate with lower, no-risk PBGC Rates) “can be accepted as the anticipated plan experience.” Judge Sweet therefore ordered the plan to recalculate the employer’s withdrawal liability using the 7.5% “best estimate” rate. (As noted above, this resulted in zero withdrawal liability.)
Judge McNulty disagreed. Unlike Judge Sweet, he focused on case law developed under the minimum funding standards for single-employer pension plans. Judge McNulty found this precedent established that the “best estimate” requirement “ is “basically procedural in nature and is principally designed to insure that the chosen assumptions actually represent the actuary’s own judgment rather than the dictates of plan administrators or sponsors.” This, Judge McNulty found, mandated a “deferential analysis” on whether the “actuarial assumptions chosen were reasonable in the aggregate.” This deference allowed Judge McNulty to conclude that the arbitrator did not clearly err in finding that the employer did not meet its burden to rebut the reasonableness of the actuary’s approach, and therefore hold that using the Segal Blend to calculate the employer’s withdrawal liability was permissible.
This figures to be a hot area of litigation in the years to come. Many multiemployer plans currently use different interest rate assumptions for funding and withdrawal liability purposes. In addition to the plans that use the Segal Blend for withdrawal liability purposes, many others use the PBGC Rates to do so. These lower rates generate even higher withdrawal liability amounts than those generated by using the Segal Blend. The law in this area is evolving, and we will continue to monitor this situation for you.