Last May the FBI spent almost $250,000 (€197,000) digging for the remains of Teamsters leader Jimmy Hoffa, who disappeared in 1975 a few miles from Detroit, Michigan. Many members of the union that used to be led by Hoffa and is now managed by his son James would have preferred the money to be invested in their pension plan, especially the Central States plan. This is one of the largest and worst-funded multi-employer pension plans in the US, with more than 150,000 active participants, assets in excess of $17.7bn but only 55 cents for every dollar of liabilities in 2003 (last available data).

The Central States plan still shows scars from its very troubled past: in the 1960s and 1970s tens of millions of its assets were lent by Jimmy Hoffa to mobsters to take control of Las Vegas casinos. In 1982 the fund had to sign a consent decree with the Department of Labor, which set limits to its independence and transferred specific money management decisions to external investment firms. But the fund’s current problems do not result from bad financial strategies but from its demographics, which are shared by most multi-employer pension plans. There were around 1,600 such defined-benefit plans in the US in 2005 covering 9.9m workers, according to the Pension Benefit Guarantee Corporation (PBGC), the government-sponsored insurer. Their assets totalled $333bn in 2002 (the most recent data), but the PBGC estimated that they were underfunded by more than $200bn as of September 2005.

In other words, their shortfall was equivalent to $20,400 a participant, versus $13,235 for single-employer plans. There were nearly 30,000 single-employer plans, covering 34.6m workers, with assets of $1.6trn and a projected $450bn funding gap.

So multi-employer pension plans’ financial situation is much worse than that of other DB schemes and casts a black cloud over more than 150 public companies rated by Standard & Poor’s. The rating agency recently issued a report to draw attention to the issue and the inherent obscurity of these plans, hoping the proposed new pension legislation will make them more transparent and impose better rules on their funding. The Labor Management Relations Act of 1947 - usually known as the Taft-Hartley Act - established multi-employer plans, which are consequently often referred to as Taft-Hartley plans. The unions’ idea was to provide retirement security to workers in industries - such as the transport, building, construction, manufacturing, hospitality and grocery sectors - where employers are typically small businesses and people frequently switch jobs. Taft-Hartley plans allow members to change employers while continuing to accumulate benefits and keep their earned benefits and vesting intact, as long as the new employer belongs to the same plan.

The key differences between single- and multi-employer plans are that the latter are created and managed by many employers and a union: their trustees, consisting of an equal number of union and management representatives, control the plan’s administration; their contributions are negotiated, while benefit levels are fixed by the trustees. “Because the Taft-Hartley plans are collective, sponsoring employers may become liable beyond their otherwise pro rata share of the obligation, in the event another participant becomes insolvent,” stresses S&P’s report. “Companies that withdraw from an underfunded multi-employer plan may owe a withdrawal liability, representing their pro rata share of the total underfunded amount in the pension. Determining this withdrawal liability may be difficult.” The PBGC insures against plan insolvency by providing financial assistance in the form of loans to an insolvent plan, but does not take over the plan. Proposed legislation will ask trustees of plans funded between 65 and 80% to adopt a programme to cut the shortfall by one third within 10 years; trustees of plans less than 65% funded will have to develop a strategy to exit critical status within 10 years, including cost reductions and contribution increases.

However, the new provisions will not solve the structural problems of the Taft-Hartley plans: when an industry is afflicted by a wave of bankruptcies, as the trucking business was after the 1979 deregulation, its multi-employer plans are left with fewer sponsors, fewer active workers and more retirees. The imbalance between fewer contributions and growing benefits inevitably leads to a widening deficit gap.

That is the sad story of the Teamsters’ Central States plan: in August 2005, the fund reported 151,000 full-time active participants, down 1.2% from the previous year, while the number of retirees rose by 1.4%, to 210,000. The consequence is that the fund paid out $1.3bn more in benefits than it collected in employer contributions, and the difference came from its assets.

The irony is that the Central States
plan is actually well managed now: after the bear market years, the fund rebounded in 2003, rising 25.5%, putting it in the top quartile of the Taft-Hartley plans tracked by Wilshire. Since 2003, 20% of the fund’s assets are placed in a passive domestic fixed-income index; three quarters of the rest is managed by Goldman Sachs Asset Management and the remainder by Northern Trust Global Advisors. But, no matter how brilliant the investment strategy, the financial situation is bound to worsen.