Multi-Employer Pensions May Face Painful Disclosures

Companies paying into multi-employer pension plans may be facing some catch-up contributions that could create new liabilities on the balance sheet and a long list of new disclosure requirements.

Multi-employer plans are defined-benefit pension plans typically bargained through labor unions, such as the pension plan provided to Teamsters, for example. As such, multiple unrelated corporate participants might be contributing to a single plan to support the monthly retirement benefit promised to members through labor contracts. And like many long-term investment plans these days, multi-employer plans are woefully behind target.

Moody’s Investor Services recently analyzed 126 of the largest multi-employer plans, and found them to be under-funded by an aggregate $165 billion at the end of 2008. The Pension Benefit Guaranty Corp., which guarantees 1,500 multi-employer plans in the United States, has tracked deficits every year since 2003.

Federal law—specifically the Pension Protection Act—does require those plans to close that gap, and Julie Stich, a research specialist at the International Foundation of Employee Benefit Plans, says plan sponsors are taking measures to improve their fiscal health. For most plans, she says, the chosen solution is to require participating companies to increase their contributions.

The problem: You won’t find any hint of that burgeoning obligation in public companies’ financial statements. Corporations are required to show their expense each year for making contributions to multi-employer plans, yes—but not the funding status of those plans, or any future liabilities under-funded plans may carry. Therefore, financial statements offer no clue to the mounting deficits and the obligation any particular company may face to prop up a given plan.

Stoler

Ken Stoler, a partner in the human resources practice at PwC, says accounting rules for multi-employer plans only require companies to record their expense when they make required contributions. That’s very different from rules for corporate-sponsored pension plans, which require companies to produce reams of data and disclosures regarding plans assets and liabilities. “It’s very likely at some point in the future a company is going to have to make additional contributions to close the funding gap,” he says. “But that’s not very transparent in a company’s financial statements.”

“If these disclosures go through, it will be very enlightening. These are not small numbers involved here.”

—Mark LaMonte,

Managing Director,

Moody’s

Stoler says he’s starting to see more notices from plan sponsors to their corporate contributors, warning them they will have to pay more in the future to address funding problems. Depending on the form of those notices and the nature of the contributions required, PwC is telling clients they may need to book a liability in their financial statements related to such contributions.

It’s a tricky analysis, Stoler says, because accounting rules don’t specifically require companies to book a liability for ongoing contribution requirements, even if they receive notice that they’ll have to pay more in the future. But if plan sponsors are requiring companies to pay more to help revive a plan that is trailing its obligations, that could lead to a liability that should be booked in the financial statements anyway, he says.

“A lot of companies just assume they don’t have any liability that they ever have to record related to multi-employer plans,” he says. On the contrary, “if [the plan] is saying the amounts charged in the past weren’t enough, and now we need additional catch-up contributions, that should be reflected as an obligation in the financial statements now,” Stoler advises.

Mazur

Steve Mazur, a partner with Novak Francella, an accounting firm that specializes in employee benefits, agrees that a catch-up payment for past services already provided by covered employees would be recorded as a current liability. “I don’t think there would be much disagreement among accountants about this,” he says.

More Details, Please

In addition to the liability analysis around contribution increases, employers may soon be required to disclose much more about their obligations related to multi-employer pension plans. The Financial Accounting Standards Board is floating a proposal to require companies to describe the plans they support, their contractual commitments to those plans, and the expected effect on future cash flows.

FUNDING PLAN PROGRESS

Progress in Developing Funding Improvement and Rehabilitation Plans:

Progress

Percent of Respondents

Not applicable—we are well-funded; do not have to take actions to improve funding at this time

20.0%

Not yet started and/or were only recently made aware of the problem

3.8%

Awaiting guidance from professional service providers

10.5%

Working on developing plan

24.8%

Developed, but not yet implemented, a funding/rehabilitation plan

4.8%

Funding improvement/rehabilitation plan given to bargaining parties; awaiting their decision/action

2.9%

Implemented funding/rehabilitation plan

33.3%

Source

Multiemployer Pension Funding Status Survey (August 2009).

Mark LaMonte, managing director at Moody’s, says the rating agency routinely adjusts companies’ debt levels based on whatever it can glean about obligations to multi-employer plans, but information is scarce and—where it can be found through other regulatory filings—often stale. “If these disclosures go through, it will be very enlightening,” he says. “These are not small numbers involved here.”

That may be true, but numbers aside—Jonathan Boyles, a partner with the law firm McDermott Will & Emery, says the disclosure requirements would be difficult to meet because companies don’t necessarily have access to the information they’d be required to provide. A company may have a handle on its own obligation to support a plan, he says, but may not be up-to-speed on the fiscal health of the plan itself.

That means corporate contributors would have to rely on the plan sponsor to provide certain data, which would saddle plan sponsors with another cost (since they would need to provide this data to every contributor) when plans are struggling enough already.

Kurak

Another potential liability known as a “withdrawal liability” is also creating accounting and disclosure difficulties. The withdrawal liability is a standard feature in multi-employer plans meant to protect funding even if a given company drops out of the plan. Rob Kurak, a retirement consultant for HR consulting firm Mercer, says the withdrawal liability represents a given employer’s share of the total underfunded, vested benefits in the plan. In other words, it is the cost a company would need to pay to walk away from a plan and still cover the benefit promised to participating employees.

FUNDING PLAN PROVISIONS

Actions to Improve Funding Status—Funding Improvement Plan Provisions:

Provision

Percent of Respondents

Increasing employer contribution levels

85.7%

Reducing future benefit accruals

28.6%

Examining actuarial cost methods and assumptions

19.0%

Adopting the automatic five-year extension for amortization periods

11.9%

Applying for the ten-year extension of amortization periods

4.8%

Other

16.7%

Source

Multiemployer Pension Funding Status Survey (August 2009).

The rules around the withdrawal liability are complicated, making it hard to define for disclosure purposes, Kurak says. But perhaps the most frightening aspect is what happens if a given company drops out of the plan because it goes belly up—always a possibility given economic conditions these days. If a company can’t pay its withdrawal liability, “basically that portion gets reallocated among the remaining contributing employers,” Kurak says. “I don’t think you can quantify to any great degree how much that is.”

Yet FASB’s disclosure requirement would require companies to make some disclosures about the potential effects of withdrawals from the plan. “There’s a lot of concern about what’s happening with these plans, the increased contributions and the withdrawal liabilities,” Boyle says. “If a substantial number of employers withdraw, you can have a mass liability.”

Waite

Jon Waite, director of investment management advice and chief actuary at SEI, says he doesn’t expect companies to embrace the new disclosure requirements enthusiastically. “I would expect most companies, especially those with large exposures, understand this is going to be coming,” he says. “Certainly there’s the potential for cash flows to be impacted in a negative way for the next several years. Nobody is excited about making those kinds of disclosures.”