United Mine Workers of Am. 1974 Pension Plan v. Energy W. Mining Co., No. 20-7054, __F.4th__, 2022 WL 2568025 (D.C. Cir. July 8, 2022) (Before: Rao and Walker, Circuit Judges, and Sentelle, Senior Circuit Judge).
When the Energy West Mining Company withdrew from The United Mine Workers of America 1974 Pension Plan, the Pension Plan’s actuary calculated Energy West’s withdrawal liability using a risk-free discount rate and did not rely on the Pension Plan’s performance to determine what discount rate to use. The Multiemployer Pension Plan Amendments Act (“MPPAA”) requires the actuary to use “assumptions and methods which, in the aggregate, are reasonable (taking into account the experience of the plan and reasonable expectations) and which, in combination, offer the actuary’s best estimate of anticipated experience under the plan.” 29 U.S.C. § 1393(a)(1). Had the Pension Plan used a discount rate assumption based on the Pension Plan’s historic investment performance, around 7.5%, then Energy West’s withdrawal liability would have been about $40 million. However, the Pension Plan used a discount rate assumption of 2.71% for 2015 to 2035 and 2.78% for all years thereafter based on the PBGC’s projected risk-free rate for annuities. This resulted in withdrawal liability of over $115 million.
Energy West disagreed with the discount rate and pursued arbitration where it argued that the risk-free PBGC rate was not appropriate because (1) the actuary was required to “use the same or very similar rate for both withdrawal liability and [minimum] funding purposes, and (2) risk-free rates are not the best estimate of anticipated experience under the plan because they are not based on past or projected investment performance. The arbitrator rejected these arguments, finding the use of risk-free rates to be reasonable. Energy West sought to vacate the arbitration award and the district court granted summary judgment to the Pension Plan and entered an order enforcing the arbitration award. Energy West appealed.
The D.C. Circuit Court of Appeals reversed the district court. It found that the actuary must make assumptions based on the Pension Plan’s particular characteristics when calculating withdrawal liability. An actuary must use a discount rate based on an estimation of how much the Plan’s assets will earn based on their anticipated rate of return. Risk-free rates may be appropriate if a plan were invested in risk-free assets or planned to invest withdrawal liability payments in risk-free assets. Because the discount rate assumption used to calculate unfunded vested benefits was not a reasonable assumption, this was valid ground for vacating the arbitration award. Lastly, the court held that the discount rates used to calculate minimum funding and withdrawal liability must be similar though not identical because both rates must be the actuary’s best estimate of anticipated experience under the plan.
*Please note that this blog is a summary of a reported legal decision and does not constitute legal advice. This blog has not been updated to note any subsequent change in status, including whether a decision is reconsidered or vacated. The case above was handled by other law firms, but if you have questions about how the developing law impacts your ERISA benefit claim, the attorneys at Roberts Disability Law, P.C. may be able to advise you so please contact us.
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