ERISA requires that when an employer leaves a multi-employer pension plan, the plan actuaries calculate a complete or partial withdrawal liability in order to shore up any proportionate underfunding that could arise in the future. There are two key aspects of withdrawal liability — the method for determining a withdrawing employer’s allocable share of the plan’s unfunded vested benefits, and the manner in which the employer will remit payment to the plan.
The Pension Benefit Guaranty Corporation (“PBGC”) has authority to regulate all aspects of withdrawal liability. Previously, the PBGC had published final regulations on the notice, collection, and redetermination and reallocation of withdrawal liability, but that regulation does not address a plan’s adoption of alternative terms and conditions for the satisfaction of an employer’s withdrawal liability.
Historically, the PBGC has reviewed proposals by multiemployer plans to adopt alternative terms and conditions to satisfy withdrawal liability in the context of a ‘‘managed mass withdrawal’’ where a mass withdrawal of employers was imminent or had occurred (such as has happened in construction industry plans). However, according to the PBGC policy statement, the more recent trend is that more and more requests have been made to the PBGC to review proposals to adopt alternative terms and conditions to satisfy withdrawal liability in advance of a potential mass withdrawal. The main difference is that where a managed mass withdrawal has happened in the past or is imminent, the PBGC reviews actual facts. With this new rash of advanced requests for possible managed mass withdrawals, the PBGC is now required to perform case-by-case reviews and must review different contingencies with different probabilities of occurrence.
In each case-by-case review, the PBGC welcomes informal consultations with trustees and their advisors before the official review, and then more formal communications during the reviews. However, under the statute, the PBGC has a set deadline for providing a final answer, and the clock starts ticking on the date the official request is filed.
This published policy statement is, therefore, a way of informing all future parties to a proposed revision to a withdrawal liability payment scheme to understand what concerns the PBGC will likely have, so that time and resources for all parties can be minimized.
Basically, in each review, the PBGC finds it helpful to understand the following:
- The alternative terms and conditions for satisfying an employer’s withdrawal liability under the plan’s proposed rule, such as how the alternative payment amount or alternative payment schedule is determined.
- The requirements that an employer must satisfy to be eligible for the alternative terms and conditions, as applicable.
- How expected cash flows, expected unfunded liability, expected recovery of withdrawal liability, and projected insolvency dates under the statutory withdrawal liability rules compare with those likely under the alternative terms and conditions for satisfying withdrawal liability.
- The assumptions underlying the comparison of existing and alternative rules (taking into account the historical experience of the plan), including explanations and substantiations of assertions for the employers’ ability to meet their pension obligations and the extent to which employers will elect to participate in the alternative terms and conditions.
- Information on the composition of contributing employers, as applicable, such as contributions, active participants, contribution base units, the ability of employers to meet their pension obligations, and withdrawal liability estimates of significant employers, including how the alternative terms and conditions apply to significant employers.
The PBGC reminds us that their overarching responsibility in reviewing alternative terms and conditions of any withdrawal liability calculation and payment scheme includes ensuring that:
- The proposed alternative terms and conditions are in the interests of participants and beneficiaries and do not create an unreasonable risk of loss to PBGC, and are otherwise consistent with ERISA and PBGC’s regulations;
- The proposed alternative terms and conditions would realistically maximize projected contributions and the net recovery of withdrawal liability for the plan compared to the income generated by the statutory withdrawal liability rules;
- The assumptions used to support the plan’s submission are reasonable and supported by credible data; and
- The proposed alternative terms and conditions are reasonable in scope and application and operate and apply uniformly to all employers (but may consider an employer’s creditworthiness).
Although this policy statement was formally published in the Federal Register, the disclaimer indicates that “This policy statement represents PBGC’s current thinking on this topic. It does not create or confer any rights for or on any person or operate to bind the public. If an alternative approach satisfies the requirements of the applicable statutes and regulations, you may use that approach.”
The issue of withdrawal liability from multi-employer plans has been receiving increasing attention this year, as discussed in our article on recent court cases.