Questions about assumptions used by multiemployer pension plans in determining employer withdrawal liability

[Guest lisbetf]

Here are the questions I have regarding assumptions used by multiemployer pension plans when they determine employer withdrawal liability.

1. How are the interest and mortality assumptions chosen? Is the interest rate generally tied to some index so that it "floats" as interest rates float? Or are interest rates fixed and changed periodically to reflect the current interest climate? I would suspect that the mortality table is fixed and changed periodically as needed, but would like imput on that also. Are the assumptions used to determine withdrawal liability typically put in the plan document?

2. What value of assets is typically used to determine the value of unfunded vested benefits? Market value or the actuarial value used to fund the plan?

Thanks for any help you can offer!

[Guest HarveyC]

With respect to your 2nd question, my opinion (and that of many of my colleagues) is that a fund may use either (1) market value, (2) actuarial value, or (3) greater of market value and actuarial value.

The decision on what method to use typically lies with the trustees and usually on the advice of the plan actuary. The actuary would normally lay out the pros and cons of each method and may recommend one of the options.

With respect to your 1st question, that's a little more involved and I'll get back to you later (have to leave). However, a safe harbor rate based on the many arbitration cases on this subject, would be to use the valuation rate for funding purposes.

[Guest HarveyC]

With respect to your 1st question again, actuaries have used interest rates based on the PBGC rates (plus a margin) or a blend of the PBGC and funding rates. However, the vast majority of actuaries currently use the funding interest rate for withdrawal liability purposes (and hence is normally blessed by arbitrators).

In terms of mortality assumptions for withdrawal liability purposes, I don't recall ever seeing this assumption deviating from that used for funding purposes.

Hope this helps.

[KJohnson]

http://www.segalco.com/publications/survey...ndingsurvey.pdf

This was a 2000 survey, but it has information regarding interest rates. It is a Segal survey and not surprisingly most of the multis used the "Segal Method." Their actuarial methods are described as follows:

Actuarial Assumptions

The assumptions the actuary chooses, by law, must be the actuary’s best estimate of anticipated future experience under the plan. The assumptions used by almost all the plans in the survey use The Segal Company method for calculating withdrawal liability. Withdrawal liability determined under this method is a weighted average between the present value of vested benefits on adjusted PBGC interest rates and the present value of vested benefits on the funding investment return assumption, where the weighting factor is assets at market. This approach essentially treats the withdrawal like a single employer plan termination for that portion of the assigned benefits that could be purchased by existing assets. Since the remaining benefitsare funded by future contributions, the funding assumptions used to fund the ongoing pension plan are used for this portion of benefits. The distinction is assets on hand versus future assets. The PBGC rates were developed to deal with assets on hand.

For a small number of plans (28 out of 462, or 6 percent) the ongoing funding assumptions are used as the basis for determining withdrawal liability. For these plans, assets are taken at their actuarial value.