Quick Hits
- In M&K Employee Solutions v. Trustees of the IAM National Pension Fund, the Supreme Court recently concluded that actuaries for multiemployer pension funds can calculate the liability for employers withdrawing from the plan by using the assumptions that are in effect on or after the measurement date.
- Four employers that exited the IAM National Pension Fund sued over the way their unfunded vested benefits were valued.
- The Employee Retirement Income Security Act (ERISA) stipulates that an employer’s share of unfunded vested benefits shall be measured as of the end of the plan year prior to the withdrawal (the “measurement date”).
Employers that contribute to multiemployer pension plans have been monitoring this case because small changes in actuarial assumptions can cause a huge difference in an employer’s financial liability when leaving a pension plan.
Factual Background
In 2018, M&K Employee Solutions withdrew from its multiemployer pension plan with IAM National Pension Fund, which primarily covers unionized machinists and aerospace workers. To calculate the plan’s underfunding, the pension fund’s actuary applied a 6.5 percent interest rate, adopted in January 2018, resulting in an amount exceeding $3 billion for the 2017 plan year. This figure was six times higher than it would have been had the actuary used the 7.5 percent interest rate that was in effect at the end of 2017. Consequently, M&K incurred an additional charge of $4,360,701. Three other employers in a similar situation joined the lawsuit.
M&K argued that the fund should have used the figures effective at the end of the 2017 plan year, not new ones adopted in 2018 after the beginning of the new year, when M&K withdrew from the plan. It contended that Employee Retirement Income Security Act (ERISA) mandates the use of actuarial assumptions in effect on the measurement date, not those adopted later and applied retroactively after that date.
The trustees of the IAM National Pension Fund countered that ERISA imposes only two requirements for actuarial assumptions: they must be “‘reasonable,’” and they must represent the “‘actuary’s best estimate of anticipated experience under the plan.’” The trustees argued that the law does not impose any explicit timing requirement for when assumptions must be selected. They contended that actuaries should be permitted to use the most current and complete information available, even if that means selecting assumptions after the measurement date.
The value of the unfunded vested benefits depends on certain predictions about the future and data about the plan, such as the number of beneficiaries and the value of the plan’s assets.
Supreme Court’s Ruling
Justice Ketanji Brown Jackson, writing for the Supreme Court, found that plan actuaries may select new demographic and economic assumptions adopted after the measurement date, as long as those assumptions are based only on data and conditions that existed on or before the measurement date. The court reasoned that “ … the relevant information about the plan’s performance or macroeconomic conditions, as it stood on the measurement date, may not become available until after the measurement date” and that ERISA did not in fact mandate a hard deadline for adoption of actuarial assumptions.
“The statute requires that actuarial assumptions be ‘reasonable’ and reflect actuaries’ ‘best estimate,’” the Court stated. “ERISA does not require pension plans to assess withdrawal liability based on actuarial assumptions adopted before the measurement date.”
Next Steps
Employers planning to exit a multiemployer pension fund may wish to carefully consider the timing of the withdrawal. The measurement date for withdrawal liability will be the end of the plan’s fiscal year prior to withdrawal, but the actuarial assumptions may be tied to a later date. The timing of the withdrawal certainly may not prevent manipulation and inflated withdrawal liability assessments by the fund due to later adoption of actuarial assumptions, but employers will still have the benefit of knowing the data and conditions that existed before the measurement date.
Ogletree Deakins’ Employee Benefits and Executive Compensation Practice Group and ERISA Litigation Practice Group will continue to monitor developments and will provide updates on the Employee Benefits and Executive Compensation blog as additional information becomes available.
Russell S. Buhite is a shareholder in Ogletree Deakins’ Seattle and Tampa offices.
This article was co-authored by Leah J. Shepherd, who is a writer in Ogletree Deakins’ Washington, D.C., office.
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