It’s the best of times, it’s the worst of times for pension holders of United Parcel Service of America.
In this tale of two pension plans, if the employees are among UPS’s 125,000 nonunion workers, they’re in fine shape. Big Brown’s $10.5 billion in-house plan is one of the rare corporate schemes to be overfunded, boasting $110 in assets for every $100 in liabilities. Its portfolio returned 13.3 percent in 2004 -- the most recent year for which figures are available -- and an annualized 10.9 percent for the three years ended 2004. Those results handily best the 12.2 percent and 7 percent returns, respectively, for plans of the nation’s 100 biggest corporations, according to Seattle-based Milliman Consultants.
However, if a UPS employee happens to be among the company’s 220,000 unionized employees -- more than half of them drivers -- who are covered by one of Big Brown’s 21 union-affiliated multiemployer pension plans, he or she could be in a tough spot.
The second-biggest such scheme, the $18.5 billion (2003 assets) Teamsters Central States plan, which analysts estimate provides benefits for about one in four UPS drivers, had only 55 cents for every dollar of liabilities in 2003. The drivers for the world’s biggest package delivery company have seen their benefits shrink, even as UPS earned $3.3 billion on revenues of $36.6 billion in 2004. The company ranks among just six nonfinancial U.S. businesses with a triple-A bond rating from Standard & Poor’s and it predicts an 18 to 20 percent surge in earnings for 2005.
“UPS is getting wealthier while the drivers’ pension plan is in a death spiral,” contends Herve Aitken, a labor attorney at Ford & Harrison in Washington, D.C., who represents the Multiemployer Pension Plan Alliance, a coalition of small employers.
It’s an awkward dilemma for the nation’s third-largest employer. Big Brown provides generous retirement benefits to its nonunion employees, from secretaries to senior vice presidents. Some can retire at half their highest year’s salary at age 55 if they have 25 years of service. But many of its unionized full- and part-time drivers are stuck in pension plans so poorly funded that the plans had to cut benefits in 2004 and 2005.
Before 2004, Central States members who had participated for 25 or 30 years could receive full pension benefits at any age. Those “25- and 30-and-out” early retirement benefits are now gone, and pension payments will be reduced by 6 percentage points, on a cumulative basis, for each year the retiree is below age 62.
UPS is not alone in facing this pension dichotomy. All told, some 65,000 companies nationwide participate in so-called multiemployer plans sponsored by unions. Yet UPS and its peers can do frustratingly little to rectify their unionized employees’ plight. The plans are jointly trusteed, with management and labor claiming equal representation. Central States, for instance, has five trustees from labor and five from management, including one from UPS. For that reason, UPS itself has limited influence over the policies and practices of the Central States plan.
“Our biggest single concern about multiemployer plans amid all the debate over pension funding nationwide is simply to do everything we can to safeguard the pensions of our unionized workers,” says Norman Black, director of media relations for UPS, which is reluctant to discuss its pension situation. “Our unionized employees work very hard for us, and when they’re ready to retire, there ought to be a good pension for them.”
The U.S. pension crisis has sparked a raft of proposed legislative solutions on Capitol Hill that would overhaul the rules governing pension funding (see story, page 21), along with front-page stories in the nation’s newspapers -- pension issues were at the heart of the December New York City transit workers’ strike. But the troubled state of the nation’s multiemployer plans has gotten much less attention.
They’re a smaller cohort, to be sure. Some 1,600 multiemployer plans covered 9.9 million workers in 2005; assets in those plans totaled $333 billion in 2002, according to the most recent data from the Pension Benefit Guaranty Corp., the government-sponsored insurer. By contrast, nearly 30,000 single-employer plans covered 34.6 million workers and reported assets of $1.6 trillion in 2002.
Participants in multiemployer plans are much more likely to be in troubled retirement systems. In 2002, 26 percent belonged to plans that were less than 70 percent funded; only 5.7 percent of those in single-employer plans were in plans with funding ratios below that mark. The situation is considerably worse today.
Multiemployer plans are, on average, even less well funded. If the plans had to pay off all their obligations as of September 2005, the PBGC reckons that single-employer plans would have been short more than $450 billion, while multiemployer plans would have been underfunded by more than $200 billion. Thus the multiemployer shortfall is equivalent to $20,400 per participant, versus $13,235 for single-employer plans.
Proposed legislation will tighten funding requirements for multiemployer plans. The goal is to financially strengthen the plans, but the added pressure will make the most financially troubled plans more expensive for the employers and less generous for the participants.
Trustees of “endangered” plans funded between 65 and 80 percent will have to adopt a program to cut the shortfall by one third within ten years. Trustees of “critical” plans less than 65 percent funded will have to develop a strategy to exit critical status within ten years; the plan must include cost reductions and contribution increases.
The pension plight is ironic, because one of the early functions of labor unions was to provide retirement security. Union plans didn’t take their current form until 1947, when multiemployer plans, also known as Taft-Hartley funds, were established by the Taft-Hartley Act, which defined many of the rules governing labor-management relations. The plans were designed so that construction workers, truck drivers and other laborers who frequently change employers could build up retirement benefits. The Teamsters organized much of UPS’s workforce in the 1920s.
In a strange turnaround, some of the multiemployer plans are now hurting the workers they were meant to protect. In healthy industries, such as health care and computer equipment, the average plan is fully funded; the PBGC is providing assistance in the form of loans to only 38 multiemployer plans, compared with more than 3,600 ongoing single-employer plans. But the Achilles’ heel of multiemployer plans is that the otherwise sound collective structure can unravel in declining or consolidating industries like trucking, steel and, more recently, supermarkets. When an employer files for bankruptcy and drops out of a multiemployer plan, its unfunded retirement liabilities are jointly assumed by the companies still participating in the plan. In contrast, when a single-employer pension plan goes bankrupt, the PBGC takes charge of its liabilities, paying a portion of the obligations owed.
“The law has created traps and penalties that will forever drive current and prospective employers away,” said John Ward, president of Standard Forwarding Co., a small trucking outfit in East Moline, Illinois, that participates in the Central States plan, in congressional testimony in June 2005.
Standard Forwarding has had to assume an ever-larger amount of unfunded liabilities in the Central States plan. In 2001 it had an unfunded liability of $15,200 per employee; by 2004 that figure had more than quadrupled, to $68,500. With 292 union employees, unfunded liabilities totaled $20 million, or $16 million more than the company’s equity. As a result, Ward testified, “it’s almost impossible to sell our company. No prudent investor is willing to inherit [our] mounting liabilities.”
“It’s losing for winning,” says Alexander Sussman, national retirement practice leader for Segal Co., a New Yorkbased consulting firm. “You drive your competitor out of business and you get his pension liability as a reward.”
Given Central States’ gaping shortfall and the negative cash flow that reflects its poor demographics, analysts say it will be very hard for the plan to get out of its hole, threatening participants with reduced benefits and their employers with increases to already substantial contributions. UPS does not break out payments to specific funds, but in 2004 it contributed $1.16 billion to its multiemployer pension plans.
A big part of the problem: the Central States plan is bleeding cash. In 2004 the fund paid out $1.3 billion more in benefits than it collected in employer contributions. The difference came, as it must, from fund assets. In August 2005, Central States reported 151,000 full-time active participants, down 1.2 percent from the previous year. Between August 2004 and August 2005, the number of retirees rose by 1.4 percent, to 210,000.
Since no companies are likely to join such a vulnerable plan, there will be no infusion of new employer contributions. As more employees retire, the demographics at Central States, and the plan’s cash flow, will deteriorate even more.
A similar vicious cycle could play out at other troubled multiemployer plans. Workers face the threat of further cuts in their retirement benefits. Companies must contend with the possibility of increased contributions -- which could spike if major employers in the plan file for bankruptcy and dump their liabilities on the remaining employers.
“Unless we take remedial action, some multiemployer plans are going to implode,” says John Motley, senior vice president for government and public affairs at the Food Marketing Institute, a Washington, D.C.based trade group that represents 1,500 food retailers and wholesalers. Supermarkets employ 3.5 million Americans; about one third are covered by multiemployer pension plans, which are affiliated primarily with the United Food and Commercial Workers Union.
Many UFCW plans are struggling. The second-largest, the Southern California UFCW Unions & Food Employers Joint Pension Trust Fund, with some 151,000 participants, reported $3.3 billion in assets on April 1, 2003, versus liabilities of $5.3 billion, according to Larkspur Data Resources, a pension database provider in Novato, California. Many retailers have been pressured by nonunion discounters like Wal-Mart Stores, whose 2004 grocery sales of $115 billion were the nation’s highest.
UPS may be thriving but the unionized trucking industry is ailing, which puts all the more pressure on Big Brown as a healthy survivor among multiemployer plan sponsors. Reflecting the spate of bankruptcies in trucking over the past 20 years, two major Teamster plans that serve UPS union workers, in New England and Philadelphia, reported funding ratios just below 60 percent in 2004.
That year more than half of the 21 multiemployer plans to which UPS contributes had funding ratios below 75 percent. Neither UPS nor the Central States plan would estimate the company’s share of unfunded obligations; however, one official of the Teamsters for a Democratic Union, a dissident group of Teamsters, estimates UPS’s share of unfunded liabilities at Central States alone at roughly $2 billion. The UPS nonunion plan, by contrast, is overfunded.
Still, the underfunding at Central States and other multiemployer pension plans doesn’t threaten UPS’s balance sheet or its sterling credit rating. Even if the company were to withdraw from the Central States plan and assume its share of unfunded plan liabilities, the company would likely spread payments out over several decades, greatly minimizing the impact on its financial position. “This would not present a significant financial problem for them,” says Philip Baggaley, head of Standard & Poor’s transportation rating team.
Other companies, financially weaker than UPS, would be less able to absorb the hit.
By any measure, UPS has limited control over its multiemployer pension plans, which cover union workers from more than one company, often in related industries in a single region. Central States serves more than 4,500 companies in 22 states. In 2003 it reported 454,322 participants on its roster, of whom 164,767 were active employees; the others were current or future beneficiaries or their survivors. (Of the total U.S. workforce of 123.6 million in 2004, 12.5 percent, or 15.5 million, belonged to unions, according to the Bureau of Labor Statistics.)
Few U.S. companies offer their employees retirement benefits as generous as those of UPS. For nonunion employees, these are calculated using two formulas; the employee receives a pension based upon the formula that produces a higher benefit. The standard formula, which is typical for single-employer plans, provides a pension equivalent to 1.67 percent of the average of an employee’s five highest annual salaries times the number of years of service, up to an annual limit of $220,000. For example, after 30 years, a worker with a final average salary of $100,000 would be entitled to $50,000. That would then be reduced by 50 percent of the retiree’s Social Security payment, or about $11,000. The final annual pension: $39,000.
The alternative formula for nonunion employees does not adjust for Social Security and uses a five-year average to determine final salary. Based on that, an employee receives an annual pension equal to 2 percent of his first $48,000 in salary plus 0.5 percent of the rest, times the number of years of employment. A worker with a final salary averaging $100,000 could retire after 30 years with up to $36,600. UPS also makes a 100 percent matching contribution to nonunion employees’ 401(k)s, up to 3 percent of salary.
Drivers in UPS’s multiemployer plans also earn substantial pensions -- but, unlike their nonunion colleagues, they receive less protection against inflation and no 401(k) match. They are more vulnerable to inflation because their pension payments are an average of contributions made over a driver’s career, not his highest-paying years. So, for example, a new full-time UPS driver starting in 2006 and contributing to the Central States plan would get a monthly pension of $113 for each year of full-time service. After 30 years at that rate, he would receive $3,390 monthly, or $40,680 a year after age 62.
Until recently, the Central States benefit formula was a little better for workers. Before 2004 union workers could retire and receive benefits after 25 or 30 years of service -- regardless of their age. Other multiemployer pension plans with major UPS participation are in better shape and offer more generous benefits than Central States.
The nation’s biggest multiemployer plan, the Seattle-based Western Conference of Teamsters Pension Plan, with $28.3 billion in assets as of January 1, 2005, had a healthy 98 percent funding ratio on that date. A UPS spokesman declines to say how many UPS drivers belong to the Western States plan, but the number is less than the 25 percent of all drivers who belong to Central States. Western is in stronger shape than Central in part because it is more diverse: Its top 50 contributors represent 19 industries, including waste management and beverages. A new full-time UPS driver starting next year who was covered by the Western Conference plan would receive after 30 years of service close to $6,000 in current dollars a month. He could also begin drawing that pension at age 50.
AN ENCOURAGING NOTE FOR UPS’S CENTRAL States pension holders: Despite the plan’s poor funding status and deteriorating benefits, its portfolio outperformed even the UPS corporate plan in 2004. Central States returned 14.3 percent, versus 13.3 percent for UPS, thanks to superior performance from its money managers.
Central States has also beaten most of its Taft-Hartley peers lately. For the 12 months ended June 30, 2005, the plan returned 13.0 percent, versus the 9.0 percent median, according to consulting firm Wilshire Associates. For the three years ended June 30, Central States returned 10.9 percent, versus the median 9.9 percent.
That makes the Taft-Hartley plan almost as successful as UPS’s in-house plan. Much of the credit for the impressive portfolio performance of the single-employer nonunion fund goes to its investment manager for the past four years, Lisa Hillman, 44. An MBA in finance from Georgia State University who worked as a structured-finance manager for electricity generator Southern Co. before joining UPS in 2000, Hillman leads a four-person team and reports to the plan’s board of trustees -- one human resources executive and two UPS accountants.
Hillman has overhauled the plan’s manager roster, while leaving the asset allocation she inherited basically intact. Recently, the plan was keeping 44 percent of its assets in domestic equities (roughly 15 percent small cap and 85 percent mid- or large cap, including just under 4 percent in UPS stock); 16 percent in international equities; 24 percent in fixed income; and 15 percent in alternatives, including 7.5 percent in real estate, 5 percent in private equity -- much of it through funds of funds -- and 2.5 percent in hedge funds. The remaining 1 percent is in cash. The exposure to alternatives dates back more than a decade.
Over the past 18 months, Hillman has dumped all 15 of the fund’s conventional active managers and indexed the entire large- and midcap domestic equity portfolio. Previously, only half had been indexed.
“We had too many managers,” explains Hillman. “So we evolved into indexing large- and midcap stocks. You always hit your benchmark, and your fees are incredible.”
Small-cap and international equities are actively managed and will remain so for the foreseeable future. “We still believe that active management can attain alpha in these arenas,” Hillman says. “With 22 countries in EAFE, for example, there are still lots of levers to pull -- between currencies and different markets.” Alpha is measured in rolling three-year increments. “Our performance has already improved,” Hillman notes.
Although UPS’s in-house plan is admired in the pension industry, its chief external counterpart, the Rosemont, Illinoisbased Central States plan, has drawn attention of another kind. In 1982 the fund signed a consent decree with the Department of Labor that resulted from findings of massive corruption in the 1960s and 1970s, when the fund, once controlled by Teamsters head Jimmy Hoffa, lent tens of millions to mobsters to take control of Las Vegas casinos. Under the terms of the decree, Central States trustees are allowed to set overall investment goals but they must leave specific money management decisions to independent investment firms. The fund’s operations are closely monitored by Judge James Moran of the U.S. District Court for the Northern District of Illinois in Chicago.
In May 2003 the consent decree was amended to require that 20 percent of the fund’s assets be placed in a passive domestic fixed-income index designed to match the Lehman Brothers aggregate bond index. The named fiduciaries have discretion over 80 percent of the fund’s assets. Goldman Sachs Asset Management currently manages three quarters of that and Northern Trust Global Advisors, the remainder. (Northern Trust took over from J.P. Morgan Investment Management, which discontinued its named-fiduciary business in June 2005.)
These days the fund’s notoriety has more to do with its financial straits. Since 1985 contributions from active workers have failed to cover benefit payments. That decline reflects the consolidation of the trucking industry. Since 1979, 43 of the 50 largest trucking firms have gone out of business or been bought, and several hundred thousand union trucking jobs have disappeared. In 2003, reflecting the shortage of active workers, employers contributed only 46 cents for every dollar in benefits paid by the plan.
“Thousands and thousands of trucking companies have gone out of business since deregulation,” says UPS spokesman Black. “And most are leaving behind retirees who no longer have an employer making payments on their behalf.”
In addition, disbursements are rising because Central States plan members are living longer. Since 1988 the average number of monthly payments per retiree has grown by about 50 percent, to 211 months.
Bull market investment returns more than offset the Central States operating deficit through 1999, when assets peaked at $21.3 billion. But the ensuing bear market forced the fund to confront the fallout from its worsening demographics. Assets slid to $15.4 billion at the end of 2002; half of the decline was caused by investment losses, the rest by benefit payments in excess of employer contributions. The fund eked out a return of 0.5 percent in 2000, versus the median 2.3 percent for Taft-Hartley plans; but it dropped by 4.5 percent in 2001, compared with the median fall of 3.6 percent, and fell another 10.9 percent in 2002, versus the median decline of 8.3 percent, according to Wilshire Associates. During the bear market years, the fund was hurt by its above-average exposure to equities.
The Central States plan rebounded smartly in 2003, rising 25.5 percent, putting it in the top quartile of the universe of Taft-Hartley plans tracked by Wilshire. In 2004 the fund returned 14.3 percent, with year-end assets of $18.5 billion, and again ranked in the top quartile.
Central States’ slightly outsize bet on equities paid off once the market bounced back. At the end of June, 65 percent of its assets were in stocks, compared with a median allocation of 57 percent among Taft-Hartley plans. What’s more, that stock portfolio returned 11.7 percent for the 12 months ended June 30, outpacing the Taft-Hartley median of 10.7 percent. Fixed income (30 percent of the portfolio versus the median 33 percent) also outperformed, returning 12.8 percent, placing it in the top quartile, according to Central States. Over the three years ended June 30, 2005, equities returned an annualized 5.7 percent, exactly matching the median; fixed income returned 8.1 percent, versus the median 7.2 percent.
But impressive portfolio performance can’t close the gaping funding gap or the negative cash flow that reflects the plan’s worsening demographics. “The actuaries have told us that they need returns of better than 80 percent for several years to get back on solid funding,” said John McDevitt, thenUPS senior vice president, in 2004 congressional testimony.
In an effort to close the Central States funding gap by however small a margin, in 2004 and 2005 plan trustees reallocated some payments earmarked for medical benefits to pensions, boosting annual contributions by some $200 million. They also lowered the rate at which pension benefits accrue and eliminated early retirement benefits.
The plan got welcome news in July 2005 when the Internal Revenue Service approved Central States’ request for a ten-year extension for amortizing unfunded liabilities. As a result, Central States has more time to improve its funding shortfall, thus avoiding triggering a rule which would have required significant extra contributions from UPS, Yellow Roadway Corp. and ABF Freight Systems, among others, to narrow the funding gap over three to five years. Contributions could have escalated as much as 48 percent annually, but the risk of such a steep hike has now been delayed for at least several years, says labor lawyer Aitken.
That staves off disaster, but it doesn’t begin to solve the fundamental problems afflicting one of the major union retirement plans at UPS. Meanwhile, its nonunion pension plan continues to flourish. It’s an embarrassing combination for UPS, but there’s not much the company can do about it.
A flimsy safety net
At the end of September, the Pension Benefit Guaranty Corp., the federal corporation charged with protecting workers’ pensions, reported a deficit of $23 billion. But only 1 percent of that shortfall related to the $200 billion in multiemployer retirement plans -- despite their being generally more troubled than their single-employer counterparts (story).
The discrepancy in coverage comes down to this: Workers in multiemployer plans have a much flimsier safety net if the companies providing their pensions go under. Although the PBGC will pay up to $47,659 a year for a 65-year-old worker in a terminated single-employer plan, an employee covered by a multiemployer plan is guaranteed a maximum of $12,870 a year.
What’s more, the PBGC has less skin in the multiemployer game. When a single-employer plan is terminated, the PBGC assumes its liabilities and pays the benefits -- up to its maximum guarantees. But when a company belonging to a multiemployer plan goes belly-up, any unfunded pension liabilities become the burden of the remaining companies. If the plan lacks the cash to pay benefits, the PBGC will provide a loan that enables administrators to pay participants up to the guaranteed level. The PBGC is now providing loans to 38 multiemployer plans.
Why such inequity? The robust, collective structure of multiemployer plans in theory allows the PBGC to take a more limited role than it does with single-employer plans. Congress has in the past considered, but never passed, legislation to raise the PBGC’s guaranteed benefit levels. -- S.B.
