US Union Pensions Hole Deepens to $369bn
by Dan McCrum and Ajay Makan

The Financial Times
April 8, 2012

http://www.ft.com/intl/cms/s/0/45dbbafe-7838-11e1-bffc-00144feab49a.html#axzz1rbNXm8Ud

The hole in the pension plans of US labour unions now
stands at $369bn 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 per cent funded, the bank
calculates with m ost 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 $43bn. 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 capitalisation.

There is also a "last man standing" risk for companies
if other contributors to a fund fail. In 2007 it cost
UPS $6.1bn to withdraw entirely from the Central States
Pension Fund, capping its liability.

More than 10m 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 unionised
workforces, such as construction, transport, retail and
hospitality.

The Financial Accounting Standards Board, which
regulates reporting of US 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 smooths
investment returns over several years and discounts the
size of future payments to beneficiaries at an expected
rate of investment returns of 7.5 per cent annually.

Critics argue that this produces an overly optimistic
view of assets and liabilities: on this actuarial basis
multi-employer plans are 81 per funded, a gap of only
$101bn. Safeway last week said that its liability was
$1.88bn "on the basis established by the Pension
Protection Act of 2006". Credit Suisse estimates that a
fair value for the liability is $7bn, more than the
company's market capitalisation.

The Pension Benefit Guaranty Corporation, which insures
US pension schemes, estimates that at the start of
2009, the most recent figures it has published, multi-
employer plans were 48 per cent funded, with $331bn of
assets to fund $686bn of liabilities.

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