United Mine Workers of Am. 1974 Pension Plan v. Energy W. Mining Co.

• Decision Date: 08 July 2022
• Docket Number: 20-7054
• Citation: 39 F.4th 730
• Parties: UNITED MINE WORKERS OF AMERICA 1974 PENSION PLAN, et al., Appellees v. ENERGY WEST MINING COMPANY, Appellant
• Court: U.S. Court of Appeals — District of Columbia Circuit

39 F.4th 730

UNITED MINE WORKERS OF AMERICA 1974 PENSION PLAN, et al., Appellees

v.ENERGY WEST MINING COMPANY, Appellant

No. 20-7054

United States Court of Appeals, District of Columbia Circuit.

Argued October 25, 2021

Decided July 8, 2022

Yaakov M. Roth argued the cause for appellant. With him on the briefs were Sherif Girgis, Gregory J. Ossi, Mark H.M. Sosnowsky, and Christopher R. Williams.

Bryan Killian argued the cause for appellee. With him on the brief were John R. Mooney, Paul A. Green, Olga M. Thall, and Stanley F. Lechner. Charles P. Groppe entered an appearance.

Before: Rao and Walker, Circuit Judges, and Sentelle, Senior Circuit Judge.

Rao, Circuit Judge:

The Multiemployer Pension Plan Amendments Act ("MPPAA") requires an employer to pay "withdrawal liability" if it decides to leave a multiemployer pension plan. Calculating the amount of money the employer owes the plan requires an actuary to project the plan's future payments to pensioners. As with any financial projection, this requires making assumptions about the future. The MPPAA requires the actuary to use "assumptions and methods which, in the aggregate, are reasonable (taking into account the experience of the plan and reasonable expectations) and which, in combination, offer the actuary's best estimate of anticipated experience under the plan." 29 U.S.C. § 1393(a)(1).

The Energy West Mining Company ("Energy West") withdrew from the United Mine Workers of America 1974 Pension Plan ("Pension Plan") in 2015. In calculating Energy West's withdrawal liability, the actuary did not rely on the Pension Plan's performance to determine what discount rate to use, but instead adopted a risk-free discount rate. An arbitrator upheld the risk-free discount rate and the district court granted summary judgment to the Pension Plan, enforcing the arbitral award. We reverse because the actuary's choice of a risk-free rate violates the MPPAA's command to use assumptions that are "the actuary's best estimate of anticipated experience under the plan."

I.

A.

To ensure that employees who were promised a pension would actually receive it, Congress enacted the Employee Retirement Income Security Act of 1974 ("ERISA"). See 29 U.S.C. § 1001(a) ; Pension Benefit Guar. Corp. v. R. A. Gray & Co. , 467 U.S. 717, 720, 104 S.Ct. 2709, 81 L.Ed.2d 601 (1984) ; see generally Pub. L. No. 93-406, 88 Stat. 829 (codified as amended at 29 U.S.C. §§ 1001 et seq. and in scattered sections of the Internal Revenue Code). By the late 1970s, it had become clear that ERISA was failing to stabilize multiemployer pension plans—those maintained pursuant to a collective bargaining agreement between multiple employers and a union.¹ R. A. Gray , 467 U.S. at 721–22, 104 S.Ct. 2709 ; see also 29 U.S.C. § 1002(37)(A) (defining multiemployer plan). Like single employer plans, multiemployer plans had to meet minimum funding standards, which require employers to contribute annually to the plan whatever is needed to ensure it has enough assets to pay for the employees’ vested pension benefits when they retire. See Milwaukee Brewery Workers’ Pension Plan v. Jos. Schlitz Brewing Co. , 513 U.S. 414, 416, 115 S.Ct. 981, 130 L.Ed.2d 932 (1995). Unlike employers managing a single employer plan, however, employers in multiemployer plans could withdraw without triggering the plan-termination provisions of ERISA and thereby avoiding obligations to make ongoing contributions.²

If a multiemployer plan was financially stable, then ERISA worked. But if a plan became financially troubled, large contributions would be needed to meet minimum funding standards, incentivizing employers to withdraw and precipitating a death spiral for the plan. See id. at 416–17, 115 S.Ct. 981. Every employer withdrawal would shrink a plan's contribution base, forcing the remaining employers to make even larger contributions and increasing their incentive to withdraw. ERISA's only check on this incentive was that if a plan terminated within five years of an employer's withdrawal, that employer would be liable for its share of the unfunded vested benefits. 29 U.S.C. § 1364 (1976) ; Milwaukee Brewery Workers’ Pension Plan , 513 U.S. at 416, 115 S.Ct. 981. Despite this risk, however, employers chose to withdraw, causing "a significant number of [multiemployer] plans" to experience "extreme financial hardship." R. A. Gray , 467 U.S. at 721, 104 S.Ct. 2709.

In response, Congress enacted the Multiemployer Pension Plan Amendments Act of 1980, Pub. L. No. 96-364, 94 Stat. 1208. The MPPAA "transformed what was only a risk (that a withdrawing employer would have to pay a fair share of underfunding) into a certainty" by requiring employers to pay "a withdrawal charge" upon their complete or partial withdrawal from a plan. Milwaukee Brewery Workers’ Pension Plan , 513 U.S. at 417, 115 S.Ct. 981 ; see 29 U.S.C. § 1381(a). Specifically, a withdrawing employer must pay the plan its proportional share of the plan's "unfunded vested benefits," 29 U.S.C. § 1381(b)(1), which is "the difference between the present value of the plan's vested benefits and the present value of its assets," Connors v. B & H Trucking Co. , 871 F.2d 132, 133 (D.C. Cir. 1989) ; see 29 U.S.C. § 1393(c) (laying out this calculation).

An actuary must make numerous assumptions to calculate an employer's withdrawal liability. For example, to project the plan's vested benefits, the actuary must make assumptions about how long employees will work and how long retirees will live. The actuary also must make an assumption about the discount rate, i.e., the rate at which the plan's assets will earn interest.³ The discount rate is the weightiest assumption in the overall withdrawal liability calculation. See Combs v. Classic Coal Corp. , 931 F.2d 96, 101 (D.C. Cir. 1991) (explaining that an "erroneously low" discount rate, without appropriate offsetting assumptions, might "destroy the validity of the entire calculation" of unfunded vested benefits).

In the absence of a relevant regulation, an actuary must calculate withdrawal liability using assumptions "which, in the aggregate, are reasonable (taking into account the experience of the plan and reasonable expectations) and which, in combination, offer the actuary's best estimate of anticipated experience under the plan." 29 U.S.C. § 1393(a)(1) ; see also id. § 1393(a)(2) (allowing the use of assumptions set forth in Pension Benefit Guaranty Corporation ("PBGC") regulations).

ERISA and the MPPAA lay out a system to adjudicate disputes over withdrawal liability. The pension plan is responsible for initially determining an employer's withdrawal liability. Id. § 1382(1). If an employer wants to contest the plan's determination, it must first do so through arbitration. Id. § 1401(a)(1). In those and all subsequent proceedings, a plan's determination of unfunded vested benefits "is presumed correct unless a party contesting the determination shows by a preponderance of the evidence that" either "(i) the actuarial assumptions and methods used in the determination were, in the aggregate, unreasonable (taking into account the experience of the plan and reasonable expectations), or (ii) the plan's actuary made a significant error in applying the actuarial assumptions or methods." Id. § 1401(a)(3)(B). After arbitration, any party can seek "to enforce, vacate, or modify the arbitrator's award" in district court. Id. § 1401(b)(2). The court must apply a "presumption, rebuttable only by a clear preponderance of the evidence, that the findings of fact made by the arbitrator were correct." Id. § 1401(c).

B.

The United Mine Workers of America 1974 Pension Plan is a multiemployer pension plan. Energy West was a participating employer in the Pension Plan but withdrew after closing its Utah mine in 2015. At the time of Energy West's withdrawal, the Pension Plan was projected to become insolvent as early as 2022. Needless to say, the Pension Plan had a lot of unfunded vested benefits, requiring Energy West to pay withdrawal liability.⁴

The job of calculating Energy West's withdrawal liability fell to William Ruschau, the Pension Plan's actuary. Ruschau testified that he used the Pension Plan's prior experience as a guidepost for most of his assumptions but that he did not consider the Pension Plan's historic investment performance to inform his discount rate assumption. Instead he "use[d] a reasonable risk-free interest rate," which is equivalent to assuming the plan would "buy[ ] an annuity to settle up the employer's share of the unfunded vested benefits." His justification for using risk-free rates was that when an employer withdraws from a plan, it no longer bears any risk associated with that plan's investment performance.

The choice of a risk-free rate made a material difference. If Ruschau had used a discount rate assumption based on the Pension Plan's historic investment performance—around 7.5%—Energy West's withdrawal liability would have been about $40 million. United Mine Workers of Am. 1974 Pension Plan v. Energy W. Mining Co. , 464 F. Supp. 3d 104, 111 (D.D.C. 2020). Instead, Ruschau used a discount rate assumption of 2.71% for 2015 to 2035 and 2.78% for all years thereafter, based on the rates the PBGC projected risk-free annuities will earn. See id. Applying that discount rate, Energy West's withdrawal liability was over $115 million. See id. at 120.

Energy West disagreed with the discount rate assumption and pursued arbitration.⁵ It contended that the risk-free PBGC rate was an inappropriate choice for the discount rate assumption because (1) the actuary was required to "use the same or very similar rate for both withdrawal liability and [minimum] funding purposes," and (2) risk-free rates are not the "best estimate of anticipated experience under the plan" because they are not based on past or projected investment performance.

The arbitrator rejected both arguments. He agreed with the Pension Plan that using risk-free rates to calculate...