Supreme Court Confirms Broad Actuarial Discretion in Withdrawal Liability Calculations

The decision addressed an important issue involving withdrawal liability calculations under ERISA and, more specifically, the discretion pension plan actuaries possess when selecting actuarial assumptions.

While the case focused on a narrow statutory question, the Court’s reasoning reinforces the substantial role actuarial judgment plays in withdrawal liability determinations.

THE ISSUE BEFORE THE SUPREME COURT

Calculating those liabilities requires actuaries to make assumptions about future events, including investment returns, mortality and interest rates. One of the most significant assumptions is the “discount rate” used to estimate the present value of future pension obligations.

As a general matter, lower discount rates produce larger projected liabilities, while higher discount rates reduce projected liabilities.

The dispute in M & K Employee Solutions centered on whether a pension fund could use actuarial assumptions that were adopted after the statutory “measurement date” used to calculate withdrawal liability.

The IAM National Pension Fund reduced its discount rate from 7.5% to 6.5% shortly after the applicable measurement date. That change substantially increased the fund’s unfunded vested benefits and the resulting withdrawal liability assessments. According to the Supreme Court, the fund’s UVBs increased from approximately $500 million to more than $3 billion after the assumption change. One employer’s withdrawal liability allegedly increased from approximately $1.8 million to $6.2 million, as a result.

The employers argued that the pension fund should have been required to use the assumptions already “in effect” on the measurement date. The Supreme Court unanimously rejected that argument.

SUPREME COURT: ACTUARIAL ASSUMPTIONS ARE “PREDICTIVE JUDGMENTS”

Justice Ketanji Brown Jackson, writing for the unanimous Court, emphasized that actuarial assumptions are not fixed historical facts. Instead, the Court described them as “predictive judgments about a plan’s anticipated future performance.” That became central to the Court’s analysis.

According to the Court, ERISA requires withdrawal liability to be calculated “as of” the measurement date, but the statute does not require the actuarial assumptions themselves to have been selected by that date.

The Court further explained that actuarial assumptions are “tools actuaries use to calculate the plan’s UVBs” rather than factual inputs that become frozen in time. 

The Supreme Court also relied heavily on ERISA’s requirement that actuarial assumptions reflect the actuary’s “best estimate of anticipated experience under the plan.” 

In practical terms, the Court reasoned that actuaries may need to rely on the most current market and economic information available in order to make reasonable projections.

BOTTOM LINE

The Supreme Court’s decision in M & K Employee Solutions resolved an important question under ERISA: whether actuarial assumptions used to calculate withdrawal liability must be selected before the statutory measurement date. The Court held that ERISA imposes no such deadline.

Disclaimer: This article is for informational purposes only. If you have questions or need guidance, consult your local labor attorney or labor relations department.