The hole in the pension plans of U.S. labor unions now stands at $369 billion, Credit Suisse has calculated with the aid of new reporting standards. This raises the prospect of higher pension contributions for employers and deteriorating industrial relations.
Multi-employer pension schemes, managed by trade unions on behalf of members working for many different employers, are now just 52 percent funded, the bank calculates with most of the burden to close this gap likely to fall on small and midsize companies.
S&P 500 companies’ share of this obligation is estimated at just $43 billion. However Credit Suisse identifies seven large companies in the S&P, including Safeway and UPS , where the pension liability is a significant proportion of their market capitalization.
There is also a “last man standing” risk for companies if other contributors to a fund fail. In 2007 it cost UPS $6.1 billion to withdraw entirely from the Central States Pension Fund, capping its liability.
More than 10 million people are covered by such multi-employer schemes with contribution rates typically set by the collective bargaining agreements that cover pay, benefits and working conditions. Membership of these funds, and the businesses contributing to them, tend to be concentrated in industries with highly unionized workforces, such as construction, transport, retail and hospitality.
The Financial Accounting Standards Board, which regulates reporting of U.S. pensions, now requires companies to disclose more details about their involvement with such plans in their annual regulatory filings.
Credit Suisse combined these with separate filings from over 1,350 multi-employer plans. “FASB provided the key to unlocking the door”, said David Zion, head of accounting research for the bank.
The bank’s findings contrast with the approach used by the plans themselves whereby funding levels are calculated on an actuarial basis which smoothes investment returns over several years and discounts the size of future payments to beneficiaries at an expected rate of investment returns of 7.5 percent annually.
Critics argue that this produces an overly optimistic view of assets and liabilities: on this actuarial basis multi-employer plans are 81 percent funded, a gap of only $101 billion. Safeway last week said that its liability was $1.88 billion “on the basis established by the Pension Protection Act of 2006”. Credit Suisse estimates that a fair value for the liability is $7 billion, more than the company’s market capitalization.
The Pension Benefit Guaranty Corporation, which insures U.S. pension schemes, estimates that at the start of 2009, the most recent figures it has published, multi-employer plans were 48 percent funded, with $331 billion of assets to fund $686 billion of liabilities.