Labour unions are not having the best time. Last month they suffered a major setback in Wisconsin, where Governor Walker won a recall election against union members and Democrats, who were protesting against his law removing most collective-bargaining rights from public employees. One reason why the unions lost is that those rights had assured very generous pension benefits to unionised public employees.
Another problem brewing for unions is the financial situation of the multi-employer pension plans created by union negotiations and managed by union and employer representatives. There are 1,459 of these so-called Taft-Hartley plans, which have more than 10m participants in the transportation, construction, manufacturing, hospitality and retail industries.
Multi-employer plans guarantee pension portability but are underfunded by $100-369bn (€80-294bn) - depending on the actuarial assumptions used to calculate their assets and liabilities. Many of them are seriously “endangered” to a greater or lesser extent, according to department of labor funding statistics. The bottom line is that the future of Taft-Hartley plans is uncertain, with employers trying to abandon them.
The latest concerns arose from a report by Credit Suisse, which estimated that only 4% of multi-employer plans are healthy. Credit Suisse applied the fair value of plan assets and a current liability that uses the same 4.7% median discount rate that the companies in the S&P 500 use when accounting for their own pension plans in 2011. That is a “union pension bomb”, according the Wall Street Journal, threatening the financial health of 44 S&P 500 companies that are exposed to multi-employer plans, which hold an estimated $43bn of that off-balance-sheet liability.
But the situation is even more dangerous for small, mid-cap and private firms that bear the other 88% of the $369bn deficit.
The DoL measures multi-employer plan funding with different actuarial parameters. It uses an expected rate of return (median of 7.5%) as the discount rate to calculate plan liabilities, which then become “magically” lighter. But even in the department of labor’s view, about 500 plans (37%) are less than 80% funded and thus considered financially troubled. The ones in “critical status” (less than 65% funded) or “endangered” (65-80% funded) must provide notice of their situation to their participants and adopt measures to restore their financial health.
There is no clear path to recovery for these funds. They are designed as collective pools, so when one participant goes bankrupt, the other participants become liable. That is why more and more companies are trying to leave their Taft-Hartley plans, taking advantage of a 1980 amendment to the Employee Retirement Income Security Act that requires a withdrawal penalty representing their pro-rata share of the total underfunded amount in the pensions.
However, determining this withdrawal liability is difficult, so these penalties have rarely covered the true cost of withdrawal, means liabilities for remaining companies have continued to grow.
A prominent case involved UPS, which paid $6.1bn in 2007 to exit its plan. More recently, all of the pipeline industry companies have withdrawn from the Central States plan, one of the largest multi-employer pension schemes: the plan status is “critical”, and the withdrawal will send the scheme further into red.
The right answer to this crisis would be “greater transparency, better management and supervision (including the replacement of labour managers, if need be), and phasing out such pensions in favour of company-specific defined-contribution plans,” according to the Wall Street Journal.
Not true, said Randy DeFrehn, executive director of the National Coordinating Committee for Multiemployer Plans. “Multi-employer plans… are responsibly managed, and despite the devastating events of 2008, most are on a sound financial footing.”