Cases & Deals

Employers prevail in first appellate challenge to "Segal Blend"

Clients Coalition of employers

In the first appellate decision to confront the legality of the "Segal Blend" actuarial methodology for calculating withdrawal liability, the U.S. Court of Appeals for the Sixth Circuit adopted the position that Jones Day urged on behalf of a coalition of employers as amici curiae, and held that the Blend is contrary to law.

When an employer withdraws from a multiemployer pension plan, ERISA requires that employer to pay its allocable share of the plan's unfunded vested benefits. This obligation is known as withdrawal liability. The actuarial method at issue in this case, known as the Segal Blend (after the actuarial firm that developed it), relates to the discount rate used to measure the present value of those future liabilities. The Segal Blend values a pension plan's liabilities using a discount rate based, in part, on the cost of annuitizing those liabilities. That cost, in turn, reflects the anticipated returns on virtually risk-free corporate bonds, even if the pension plan is invested in risky assets that are anticipated to yield much higher average returns. In a low interest rate environment, the Segal Blend has the effect of inflating the appearance of a plan's underfunding, requiring higher withdrawal liability payments. Indeed, in some cases, it doubles or triples the unfunded liabilities, and thus the withdrawal amount, compared to the actuary's best estimate of the pension plan's anticipated investment return.

In 2018, Jones Day secured the first federal court victory over the Segal Blend, in a case on behalf of The New York Times Company. The appeals from that decision were dismissed before an appellate ruling, however. In the Sofco case, Jones Day acted on behalf of a coalition of employers, pressing the same legal arguments that had prevailed in the New York Times case. In addition to file a written amici brief, the Sixth Circuit allowed Jones Day to participate in the oral argument in January 2021.

The Sixth Circuit's ruling is a clear and definitive blow to the Segal Blend and similar actuarial artifices. The panel, unanimous on this issue, made clear that the actuary must value the plan's future benefit liabilities based on the investment return that the actuary expects the plan to earn based on its unique characteristics and investments. With this appellate precedent now on the books, lower courts and ERISA arbitrators will likely follow suit and require plan actuaries to calculate withdrawal liability based on pension plans' investment return assumptions, precisely as the statute contemplates. This is a major victory for employers nationwide.