Withdrawal Liability Assumptions

[Guest HarveyC]

If a plan is using, say, a 6% valuation rate for funding purposes, can one justify using, say, 7.5% for determining the vested benefit liability for withdrawal liability purposes?

How could one justify using a higher rate for the latter purpose? One possible argument may be that there is built in conservatism in the funding val rate.

Any thoughts would be helpful.

[Guest Keith N]

Since no one else posted, I'll give this a shot.....

The Plan's Trustees are responsible for setting the interest rate to be used for w/drawal purposes, but similar to FASB, they often look to the actuary for a recommendation.

Many multi-employer plans simply use the funding rate as the basis for current liability, however, Segal, one of the largest multi-employer plan actuarial firms, generally uses the PBGC Plan termination rates for its clients. Segal Survey

This generally produces a conservative, but realistic, valuation of the liabilities. Other market related indexes are also used. For example the RPA current liability rate or the Moody’s AA rate.

I have seen Plan's that use a rate higher than the funding rate to value w/drawal liabilities, but I don't think it is very common. I think you need to ask "why". By using a higher rate, they are lowering the liability for withdrawing employers and therefore shifting more liability onto those employers that stay. Normally, Trustees want to do just the opposite. I would think this could raise fiduciary issues if the Trustees are routinely letting employers w/draw w/out paying their “fair share”.