Ohio Court Rules Segal Blend Violates ERISA

A federal district court in Ohio has ruled that the use of the so-called “Segal Blend” to calculate a company’s withdrawal liability when it leaves a multiemployer pension plan violates the Employee Retirement Income Security Act (ERISA).

The “Segal Blend” is a method of valuing a plan’s unfunded vested benefits to calculate withdrawal liability that was created by actuarial and consulting firm Segal. The Segal Blend combines a plan’s investment-return interest rate assumption used for funding purposes with the lower risk-free rates published by the Pension Benefit Guaranty Corporation (PBGC).

The case involves construction company Sofco Erectors Inc., the plaintiff, vs. the trustees of the Ohio Operating Engineers Pension Fund of Columbus, Ohio. The issue arose when the pension fund used the Segal Blend to assess its withdrawal liability against Sofco instead of the interest rate it used to determine funding levels. Citing the Multiemployer Pension Plan Amendments Act (MPPAA), Sofco challenged the withdrawal liability calculations and filed for arbitration. After an arbitrator upheld the fund’s use of the Segal Blend, Sofco filed a lawsuit in federal district court to vacate the arbitrator’s award.

The fund’s actuary testified during a deposition that the 7.25% rate the fund uses to determine funding levels is based on “a review of past experience and future expectations taking into account the plan’s asset allocation and expected returns.” But instead of using that rate, it used the lower Segal Blend, resulting in nearly $1 million in additional withdrawal liability. In its defense, the fund argued that the Segal Blend has long been among the leading “schools of thought among actuaries with respect to the selection of [discount] rate assumptions.”

According to ERISA, the actuarial assumptions and methods used to calculate an employer’s withdrawal liability must in the aggregate be reasonable, taking into account the experience of the plan and reasonable expectations and, in combination, offer the actuary’s best estimate of anticipated experience under the plan.

Because ERISA required the fund to apply the rate that took into account the experience of the plan and reasonable expectations, and based on the fund actuary’s testimony that the 7.25% rate was the reasonably expected return, the court found that using the Segal Blend rate was unlawful. The court said that although it is not unlawful to use different rates for funding and withdrawal liability, “there are legal grounds to find that the fund’s use of the Segal Blend in this instance was erroneous.”

The court ordered the fund to recalculate Sofco’s withdrawal liability based on the 7.25% interest rate the fund uses for determining the plan’s funding levels and adjust any payments or refunds with interest.

Lawyers Mark Gerano and Gary Greenberg of law firm Jackson Lewis P.C., who represented Sofco, said the case has “significant ramifications” for many employers that are contesting their withdrawal liability or that may do so in the future.

“Plans that use PBGC rates to calculate withdrawal liability also may be subject to challenge for the same reason as the plans using the Segal Blend,” Gerano and Greenberg wrote in an article on Jackson Lewis P.C.’s website. “Consistent with their intended use in connection with plan termination, PBGC Rates are based upon the rate of return of low- or no-risk assets, such as bonds, and may not be representative of the ‘best estimate of anticipated experience under the plan.’”