Pension Formula Calculations are for Geeks
Unless you are an employer who is currently participating in a multiemployer pension plan, the issue of withdrawal liability is probably not something you will pay much attention to. There are several reasons why you should – especially if your company is involved in any kind of merger & acquisition activity that could involve existing union operations.
Kevin M. Williams, an attorney at Ford Harrison just published a excellent legal alert describing some internal rule changes these pension plans are using that could exponentially increase any withdrawal liability you might have.
Many multiemployer pension plans are struggling financially today, and, according to the PBGC, about 10 percent of the 1,400 plans are expected to become insolvent within the next 10-15 years. These looming insolvencies were in large measure the motivation behind the 2014 law that now allows plans in “critical and declining” status to cut vested benefits.
Some pension plans are taking a different tact to deter employer withdrawals and maximize the revenue from withdrawal liability assessments. They are changing the interest rate assumption used to determine the unfunded vested benefit liabilities of the plan which, in turn, is used to calculate withdrawal liability. The plans are setting up two sets of numbers and interest rate assumptions: (1) an extremely low rate using the PBGC long-term rate of about 3.30 percent, and (2) a higher assumed rate of return of 7 to 8 percent based on historical investment returns and future projections. This is the best of both worlds for the plans. It allows these plans to report a higher funding ratio of assets to plan liabilities, but also to maximize the withdrawal liability for the employers.
That all sounds very wonky and technical, so let me lay it out for you a different way. In 1999, I worked for a company that made an acquisition of two companies and merged them into one operating division. Some of those locations had existing union contracts, a few of which participated in the somewhat infamous Central States Pension Fund which recently cut pension payments in half for some retirees. At the time of the acquisition, we asked for an estimate of withdrawal liability from the plan, and it was around $100,000. Five years later, the 100 or so employees at that same location voted to decertify their bargaining unit, forcing a withdrawal from the pension plan. Our final withdrawal liability payment was enormously higher, approaching seven figures.
Think about that for a second – nearly a 10x increase in just five years. I can’t count high enough to guess how much the liability for that same group would be today. That’s why you need to pay attention to wonky stuff like the interest rate formula for multiemployer employer plans.