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Pension Pain

Underfunded multiemployer plans could create multiple problems.
Marielle Segarra, CFO Magazine
May 15, 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, estimates Credit Suisse. 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, says Credit Suisse analyst David Zion. 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 funding estimates 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 criteria used in the report, because it uses actuarial rather than fair-value calculations. Credit Suisse used fair-value funding estimates because the report's authors believe they more accurately represent the current health of multiemployer plans.

These fair-value calculations may have a more direct impact on withdrawal liabilities (penalties that employers pay when they exit underfunded plans), since some plans use fair value to calculate these liabilities. They might also give would-be suitors reason to pause before buying smaller businesses that offer multiemployer plans, Zion says.

The finding that smaller companies were responsible for most of the estimated underfunding led the authors to another insight, that "defined-benefits plans are not just a large-cap company issue." Whereas the "transparent single-employer plans haunt the big caps and get the most attention . . . the multiemployer plans appear to be causing more trouble for mid/small cap and private companies," the researchers wrote.

Over the past couple of years, plummeting funding levels have raised employer contributions for stand-alone pension plans as well. Last 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. "It's just kicking the can down the road."




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