If you are underwhelmed by the accounting and regulatory hocus-pocus enabling public sector plans to hide the the true scope of their funding challenges with aggressive discount rates, you will be even more disappointed, but I venture not surprised, to discover that things are even murkier in the poorly covered world of Taft-Hartley (or multi-employer) plans.
If you want to learn more about this space, then I encourage you to read a recent paper by David Zion, Amit Varshney and Nichole Burnap at Credit Suisse: Crawling Out of the Shadows: Shining a Light on Multiemployer Pension Plans. I’ll summarize their key findings before giving a very brief overview of Taft-Hartley plans for anyone who is unfamiliar with them.
The three authors of the CS report are equity analysts who began looking at Taft-Hartley plan funding on the assumption (which proved correct), that a significant, misunderstood, off-balance sheet liability exists for many corporates participating in multiemployer plans. What the authors did not expect to find however was that only $43 billion of the approximately $369 billion unfunded liability is attributable to S&P 500 companies.
The aggregate funding level of the 1,350 plans reviewed by CS is approximately 52%, using a corporate bond based discount rate. This parlous funding state contrasts sharply with the plans’ own assessment of their funding levels. Using currently allowable accounting tricks (principally using the expected return on plan assets – approx. 7.5% – as a discount rate, and smoothing returns over 5 years), CS finds that the same pension plans are 81% funded!
Using CS’ analysis, 96% of plans (1,295 plans) are financially troubled (i.e. less than 80% funded) using the fair value of plan assets and current liability; the equivalent number calculated on an actuarial basis is 37% of the total (500 plans).
The majority of the unfunded liability is shared across SMid caps in the construction, transportation, services, retail trade and manufacturing industries. Corporates with exposure to multiemployer plans may see a hit to earnings in future years via increased contributions and/ or withdrawal liabilities (i.e. buying out of the plan). Industrial disruption may also arise from labor negotiations around reducing wages/ benefits etc.
Taft-Hartley (multiemployer pension plans) are collectively bargained DB plans with more than one corporate contributor. PBGC discloses that there are 1,459 such plans with more than 10 million participants. A board of trustees representing labor and management oversees the plans. Benefits are fixed based upon years of service and an hourly rate agreed with management. Costs of running the plan are run through the income statement and are fully deductible. The Pension Protection Act (2006) sets minimum funding levels.
Just when you thought things were bad enough for Taft-Hartley plans, regulators and legislators have decided to ‘help’ out by facilitating the use of higher discount rates, the pretense of ignoring prior year returns, and an extension to rehab/ improvements periods (see the CS paper for details).
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