Supreme Court Rules Against Employers in Dispute Over Pension Plans

The U.S. Supreme Court has voted unanimously to allow multi-employer pension funds to charge higher so-called exit fees when companies withdraw from plans.

Justice Ketanji Brown Jackson wrote the court’s 9–0 opinion in M & K Employee Solutions LLC v. Trustees of the IAM National Pension Fund, which was issued on May 21.

Some employers come together to create multi-employer pension plans, often under a collective bargaining agreement with a labor union in which they contract to offer defined benefits. This is different from a defined-contribution plan, which has become increasingly common because employers view it as less risky.

Such plans are regulated by the Employee Retirement Income Security Act (ERISA), a federal statute that establishes minimum standards for most voluntarily created retirement and health plans in the private sector to protect employee benefits from potential mismanagement. Plan managers are required to act in the best interest of participants and can be exposed to personal liability if they fail to do so.

As the opinion states, when an employer stops participating in a multi-employer pension plan that doesn’t have enough money to honor all the future pension payouts it promised, the employer has to compensate the fund by paying it an exit fee covering its withdrawal liability. That exit fee is the employer’s share of the plan’s unfunded vested benefits and is charged to make sure the pension plan is not made insolvent by the withdrawal. Vested benefits are financial assets that an employee fully owns.

Arriving at a value for the unfunded vested benefits requires the plan’s actuaries to predict the value of the plan’s assets and obligations in the future. To do this, the actuaries have to make assumptions about certain variables, such as how much the plan’s investments will grow in value. ERISA states that an employer’s withdrawal liability must be based on the value of a plan’s unfunded vested benefits “as of” the last day of the plan year before the employer withdraws. This date is known as the measurement date, according to the opinion.

In the case, four employers withdrew from the IAM National Pension Fund, an underfunded multi-employer pension plan, from April to December 2018. The plan was considered underfunded because it didn’t have enough money to honor all the future pension payouts it promised.

The fund evaluated each employer’s withdrawal liability as of the measurement date, the last day of 2017. Although the prior year, the fund had assumed that the unfunded vested benefits would grow annually at a rate of 7.5 percent, this time, it assumed that the investments would grow more slowly, so in January 2018, its actuaries changed the assumed rate to 6.5 percent, the opinion said.

Slower growth means greater withdrawal liability. Switching from 7.5 percent to 6.5 percent made the total underfunding appear significantly larger, increasing withdrawal liability and adding millions of dollars to one employer’s exit bill.

The employers challenged those assessments in arbitration proceedings, arguing that the fund should have used the older 7.5 percent rate, which would have reduced their withdrawal liability. The arbitrators ruled that the assessments were wrong because the fund relied on actuarial assumptions that had been in effect after the measurement date. They ruled that the fund should have used the actuarial assumptions in effect on the measurement date, or the 7.5 discount rate, according to the opinion.

The fund sought review in federal district court, which ruled that the arbitrators had erred in finding that actuaries could use assumptions in effect after the measurement date. The U.S. Court of Appeals for the District of Columbia Circuit affirmed, which expanded the employers’ liability. That ruling placed the D.C. Circuit in conflict with a decision issued by the Second Circuit. The Supreme Court affirmed the judgment of the D.C. Circuit.

Employers had argued that there should be time restrictions on the methodology used for calculating penalties. But in its decision, the Supreme Court found that actuaries are allowed to change their assumptions about withdrawal liability calculations.

ERISA, which regulates withdrawal liability calculations, “contains no requirement that actuaries use assumptions adopted prior to the measurement date,” Jackson said.

The justice said ERISA “imposes few substantive requirements” dealing with how pension actuaries make the assumptions upon which their calculations are based.

M & K Employee Solutions had argued that allowing actuaries flexibility would invite manipulation and inflated bills, but the company’s preferred way of doing things “does nothing to address these concerns.”

“Plans and actuaries could still select assumptions with an eye towards inflating withdrawal liability before the measurement date given the significant discretion they enjoy in selecting assumptions,” she said.

Employers can still go to arbitration to challenge calculations they view as unfair, the justice said.

Jackson said that Congress provided deadlines for establishing assumptions in other areas of federal pension law, but not regarding the rules regulating withdrawal liability calculations.

“We presume this omission is intentional,” she said.

“ERISA does not require pension plans to assess withdrawal liability based on actuarial assumptions adopted before the measurement date.”