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Corporate Pensions Boom but Multiemployer Plans Underfunded

The equity rally has boosted corporate pension coffers, but some companies remain at risk thanks to dangerously underfunded multiemployer plans.

Nothing like a surging stock market to boost the coffers of corporate pension plans. According to BNY Mellon Asset Management the funded status of the typical U.S. corporate pension plan stood at 76.2 percent at the end of February. This is the best funding level since August 2011, the bank and investment manager noted. The story is totally different, however, for multicompany plans. A new report issued by Credit Suisse Securities found the funding levels for these plans currently stands at a disturbing 52 percent. Most of the underfunding belongs to companies outside the S&P 500, with heavy concentration among construction, transports, supermarkets and mining, according to the investment bank, which pulled together data from 1,354 plans. “With multiemployer plans in bad shape, companies could get hit from a number of angles including, increased contributions, difficult labor negotiations, higher withdrawal liabilities ... M&A could be impacted as acquirers have to price in the underfunding,” the firm warns in its report. “The new insights may even change investor and rating agency opinions of certain companies.” Credit Suisse elaborates that companies that have multiemployer exposure could be forced to boost their contributions to the plans, which would hurt cash flows and earnings. Other companies could suffer more difficult labor negotiations as they try to cut wages and benefits. A heavily underfunded plan could impact how much a would-be acquirer would be willing to shell out or lead investors to pay a low stock price to account for this shortfall and need to boost funding. “Even credit ratings could be impacted if the ratings agencies are able to gain new insight about a company’s share of multiemployer underfunding and its impact on future cash flows,” Credit Suisse adds. Multiemployer retirement plans are designed to cover employees from more than one company in the same industry, unlike traditional company pension plans, which cover workers from just one employer. Basically employers fund the plans and the pension benefits are agreed upon under normal labor negotiations. They are geared toward workers who tend to move from company to company within one industry. There are currently 1,459 multiemployer pension plans in the U.S. with more than 10 million participants, according to Credit Suisse, citing data from the Pension Benefit Guaranty Corporation (PBGC). The investment bank stresses that information regarding these plans has historically been scant. All that was known was how much a particular company contributed to the plans. “As a result there’s an off-balance-sheet liability of unknown size lurking in the shadows for companies that participate in multiemployer pension plans,” Credit Suisse stresses. Companies are only required to provide broad-based, general information about the health of the multiemployer plans that they participate in, such as red is bad, green is good. However, Credit Suisse points out that the Financial Accounting Standards Board (FASB) is now requiring companies to provide more information about their involvement with multiemployer pension plans. It says it is able to use the new disclosures popping up in the current round of annual reports to pull these multiemployer pension plans out of the shadows. In a recent 17-page report, Credit Suisse analyzed data and estimated the funded status of more than 1,350 multiemployer pension plans through March 16, 2012. This was accomplished, in part, from reviewing the pension plan’s 5500 filing — its annual report — filed with the IRS and the Department of Labor (DOL). These data-rich filings, however, are usually a little old; in many cases the 2010 filing is the most recent available and most of the data is from the beginning of 2010. The authors rolled forward the plan’s obligations to March 16 and made adjustments, from which they estimated that U.S. multiemployer pension plans are now $369 billion underfunded, which works out to 52 percent funded — even after the recent run up in the stock market and rise in bond yields. Credit Suisse was also able to link $43 billion of the underfunding to the 44 calendar-year companies on the S&P 500 companies that participate in multiemployer pension plans by examining those companies’ filings — they tend to be among the first companies to provide the new disclosures. The investment bank found that most of the $369 billion in underfunding belongs to companies that are not part of the S&P 500. However, S&P 500 companies could ultimately be impacted. “Keep in mind that larger companies could end up taking on more of the multiemployer burden as the ‘last man standing’ in the plans, if smaller companies were to fail,” Credit Suisse warns. Credit Suisse estimates the fair value of plan assets for each multiemployer plan based on market returns and each plan’s unique asset allocation. It also assumed that contributions and benefit payments would remain the same as in the most recent reported year. Mellon says it estimated the value of assets using actual market returns and the asset allocation of a “typical” pension plan. Once a year, it reviews 10-K filings for the largest U.S. pension plans to get a baseline asset value. It then estimates throughout the year using this baseline value for assets.

The upshot: If these plans fail, it will create added stress for the already-strained PBGC, which provides guarantees and loans to the plan to pay the promised benefits. However, contrary to wide belief, taxpayers are not on the hook for these payments. Rather, the loans are funded by the insurance premiums that the PBGC collects from multiemployer plans.

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