Are Multiemployer Plans Understating Their Liabilities?

One widely regarded Wall Street analyst thinks so, based on new disclosures required by the accounting standard setters.


The inner workings of multiemployer pensions — also called Taft-Hartley plans after the 1947 Congressional act that created them — have long been a closed book to outsiders, those curious members of the public that include equity research analysts or even financial journalists. So imagine the excitement for some when, late last year, new accounting rules issued by the Financial Accounting Standards Board (FASB) went into force that required private employers who contribute to these plans on behalf of their union-affiliated employees to reveal previously opaque details about their contributions.

With the taps of new information suddenly turned on, it was perhaps inevitable that controversy would not be far behind. It soon appeared with the publication of “Crawling Out of the Shadows: Shining a Light on Multiemployer Plans.” Its author, David Zion, a highly regarded accounting analyst at Credit Suisse who was ranked second in the accounting and tax policy in last year’s All-America Research Team, had long been stymied by his inability to assess pension liability risk at large U.S. corporations that have significant union membership. To get at those numbers, Zion and his New York–based team ran the new information through their database of 1,350 multiemployer plans. “What are we trying to tell here?” explains Zion. “A story that had almost no information before.”

Among Credit Suisse’s findings was a total $369 billion plan liability and 52 percent average funding ratio. Of that, $43 billion is ascribed to the 44 largest U.S. companies with significant union membership including Safeway, United Parcel Service and United States Steel Corp. The liability, much greater than that counted by Taft-Hartley plan actuaries, were a direct result of Zion choosing to apply single-employer accounting standards — corporate bond or annuity rates at current termination value — to multiemployer plans that have traditionally used actuarial rates, currently around a 7.5 percent annual portfolio return assumption, which are much higher than current termination values. IRS rules require multis to use actuaries’ “best estimate” of future investment returns to discount their pension liabilities, whereas single-employer plans, which once also used this method, now use IRS published rates based on corporate bond yields. “With my method, the obligation is 30 percent higher,” Zion acknowledges. And he contends the actuaries’ estimates understate multiplans’ liabilities because they overstate likely returns, whereas single-employer estimates are closer to the likely mark because their discount rates are more realistic. Yet, he adds, a pension promise is the same no matter who is making it.

Naturally, the Taft-Hartley world was not pleased.

“The only thing I believe is really crawling out of the shadows are the authors of the Credit Suisse report and their lack of knowledge about how multiemployer pension plans work,” says Steve Rabinowitz, a member of the chief actuary’s office at Segal Company, a consulting firm based in New York. Speaking of Zion’s choice of pension accounting method, Rabinowitz says, “It’s making believe that multiemployer plans are single-employer plans; saying “multis” have off-balance sheet liabilities, which they don’t.” In a Spring 2012 multiemployer pension funding report, Segal found the average funded percentage was 86 percent, a figure based on “actuarial asset value,” which does not reflect market gains or losses for the year.


Provoked by the Credit Suisse report, executive director of the Coordinating Committee for Multiemployer Plans Randy DeFrehn penned a letter to the Wall Street Journal in May. “The benefits of a multiemployer plan, like a single-employer plan, are dependent on long-term investment income to fund these benefits,” argues DeFrehn. “So looking at what expected rates of return are, will be better than termination value.” DeFrehn traveled from his Washington, D.C. office to visit Zion in early July to help make his case.

Multiemployer plans, set up for different trades, were designed to allow construction workers or truck drivers, for example, to keep their pension plan when changing jobs. A number of employers, most of them very small- to mid-cap companies, contribute to these pension plans on behalf of their employees. Prior to the new FASB disclosure rule, these employers were only required to disclose one number — their total pension contribution to all Taft-Hartley plans in which they participated. Now they must provide a separate accounting of each plan contribution — large companies like UPS or Safeway can contribute to as many as 20 different plans — along with the percentage of each plan these represent. Employers must also supply the funded status of each plan — although they are exempt from revealing their share of any underfunding — and whether it is subject to a funding improvement plan as dictated by the PPA.

Rabinowitz, who described a recent meeting with Credit Suisse as “very cordial,” explained the facts of multiemployer accounting — that these collectively bargained plans are not subject to corporate bond or annuity rates as are single-employer pensions. Zion agreed that, apart from the report’s provocative title, the main disagreement turns on the discount rate he used to measure the Taft-Hartley plans’ future liabilities. As most of his work is on single-employer plans, “We’re trying to put multiemployer plans on the same footing,” he says.