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Low funding levels could force plan sponsors to raise their contributions and take on greater withdrawal liabilities.
Marielle Segarra, CFO.com | US
March 30, 2012
Underfunding of multiemployer pension plans may spell trouble for some employers this year, according to a new report by Credit Suisse.
Under fair-value calculations, multiemployer plans — collectively bargained plans maintained jointly by groups of employers and labor unions whose members work for those employers — are currently underfunded by $369 billion, Credit Suisse estimates. Most of that gap, $326 billion, is attributable to companies outside the S&P 500 and is concentrated within the construction, transportation, and mining industries.
Excessively low funding levels could lead to hikes in employers' contributions as well as in withdrawal liabilities (what a company must pay upon exiting an underfunded plan), says Credit Suisse analyst David Zion. They might also give would-be suitors reason to pause before buying smaller businesses that offer multiemployer plans, he adds.
In part, that's because the Pension Protection Act requires multiemployer plans that are less than 80% funded to take steps to nurse the plans back to health within a given time period. To accomplish that, companies might have to reduce future benefits to employees, increase their own contributions, or cut such adjustable benefits as postretirement death benefits. If bargaining over the terms of such rehabilitation comes to a stalemate, employers will face excise taxes and fees.
But if those scenarios do develop, they will do so later than might be suggested by the numbers in the Credit Suisse report. The legal standard for determining funding levels under the Pension Protection Act can be more generous to companies than the report, because it uses actuarial rather than fair-value calculations.
Credit Suisse used fair-value calculations because the report's authors believe they more accurately represent the current health of multiemployer plans, Zion says.
Over the past couple of years, plummeting funding levels have raised employer contributions for stand-alone pension plans as well. This month the Senate passed a bill that would allow employers to temporarily lower their contributions. The Credit Suisse report cautions against taking much hope from that proposal. "Pension-funding relief does not change the company's true pension obligation [but] only delays the timing of when those benefits must be funded," the authors wrote.