PROTECTING THE NEST EGG

CHRISTINA VEIDERS

A pension is a sacred cow to grocery workers in a transient labor pool. Those who work for large supermarket chains, however, may find their pensions running on empty when it's time for retirement unless action is taken to shore up trusts that are underfunded.

The solvency and accounting of multi-employer pension plans, which many large grocery chains sponsor, are undergoing serious scrutiny by labor and management as well as the government and the financial community.

The model and current laws that govern these plans make it difficult for plan participants to evaluate assets and the plan's funding status. However, both labor and management say that underfunding is a serious threat, and both sides are calling for reforms.

In his Senate testimony before the Subcommittee on Retirement Security and Aging last year, Jeff Noddle, chairman and chief executive officer of Supervalu, Minneapolis, predicted a funding crisis for some plans in the next four to six years if laws governing the plans are not changed. At the time, Supervalu participated in 17 defined benefit multi-employer plans, covering approximately 22,000 Supervalu employees throughout the United States.

"All of the Taft-Hartley funds that I deal with are underfunded - some more than others," said Brian String, president of United Food and Commercial Workers Local 152, Atlantic City, N.J. He said the problems are fixable with legislation.

Ethan Kra, principal and chief actuary with Mercer Human Resource Consulting, San Francisco, told SN that most multi-employer plans are underfunded. The question is a matter of how much they are underfunded. "In the real world there aren't many overfunded plans with any substance," he noted.

These pensions, also known as Taft-Hartley trust funds, cover workers typically within a single industry or trade in a geographic area represented by a single union such as the UFCW. In contrast to single-employer plans, multiple, related employers like large supermarket companies fund these plans and pool their risk.

Such defined benefit plans are borne out of the collective bargaining process in which employer pension contributions and benefits are negotiated and fixed for the length of contracts. UFCW contracts usually run three to five years.

An important distinction of these plans is that all assets and liabilities of the plan are a shared responsibility among employer sponsors. They are particularly appealing for industries with mobile labor such as food retailer workers who may switch employers within the same industry.

A board of trustees with equal representation from labor and management administers the trust fund and is responsible for investment of the plan's assets.

There are approximately 10 million active and retired workers in the United States covered by multi-employer plans, or about 20% of the workforce. About 1.33 million supermarket employees are covered by collective bargaining agreements.

A Matter of Debt

Not only is underfunding of these plans at issue, but there is concern what the potential impact pension fund liability will have on an employer's debt structure and cash flow.

According to a report by Moody's Investors Service - "Multi-employer Pension Plans: Moody's Analytical Approach," released this year - Moody's analyzed the funding status of 132 multi-employer pension plans and found the average plan was 77% funded, with total underfunding of about $68 billion. According to Moody's, these plans represented over half of all assets in multi-employer plans.

The credit rating service then constructed a model estimating an industry's share of underfunding.

Jim Dexter, a principal with Mercer, explained that Moody's took each multi-employer plan it looked at in six industry sectors and converted underfunding by comparing its relationship between a plan's funded status (percent of the plan funded) and annual contributions the plan receives from participating companies.

It estimated that a company's share of underfunding on average is between 3.4 times and 6.9 times its annual contribution based upon the individual underfunding multiples it derived for each industry sector it analyzed.

Supermarkets scored the highest multiple, 6.9 times annual contribution, among the industry sectors. That means that if a supermarket company contributed $1 million to a multi-employer plan its estimated liability is $6.9 million. Moody's said in its report that it will apply this analytic approach in evaluating the impact of underfunded multi-employer plans to its ratings.

"We believe that the companies' share of plan underfunding represents a long-term debt-like liability," Moody's said in the report. The report also noted that companies participating in such plans face increasing plan contributions, long-term contingent liabilities for underfunded plans, and in some cases, large onetime payments for plan withdrawal. A footnote made reference to the fact that Kroger disclosed for the first time in its 2004 annual report that its estimated share of the underfunding of the multi-employer pension plans in which it participates was $1 billion to $1.3 billion and it expected its contributions to those plans to increase by 20% this year.

Moody's could not be reached for comment on its approach.

Kra of Mercer said Moody's methodology in calculating an underfunding multiple is reasonable but the approach could use some fine-tuning.

"The supermarket industry carries significant amounts of long-term debt and sometimes a company's debt covenants involve debt-to-equity ratios," noted Mark Rowles, a principal with Mercer. "If Moody's starts making their assessments based upon adding some portion of the unfunded liability as a debt-like entity into its adjustments to the balance sheet, it could affect a company's ratings and ability to borrow."

Market Fluctuation Toll

There are simple and more complex reasons why some of these funds are in trouble. Stock market losses between 2000 and 2003 and interest rate declines during the same period created funding deficiencies.

As Mercer's Kra explained, "The market killed many of these funds. They [employers] adopted rich benefits at the peak of the market and the market went against them and many promised more than they could deliver given their contribution history."

Pat O'Neill, UFCW executive vice president and director, collective bargaining department, Washington, pointed to employers taking contribution holidays during good times when funds were fully or overfunded as another factor that offset funding levels. "There is a need for reform and the government should loosen some rules and tighten others," he noted. O'Neill said the UFCW is committed to protecting these pensions. "No matter how good 401(k) plans are, they do not take the place of defined benefit plans. One is a pension and one is a savings program," he said.

As Noddle pointed out in his testimony, the funding mechanism and tax laws existing under the Employment Retirement Income Security Act (ERISA) in the late '90s caused some of the problems. When plans became overfunded in good times, companies' contributions were not deductible under the Internal Revenue Code. So benefits were either increased or a contribution holiday by sponsoring employers was taken to reduce the overfunded plan to allow for tax deductions.

"There is a perverse section in multi-employer pension law," said John Motley, senior vice president of government and public affairs, Food Marketing Institute, Washington. "In boom years when the stock market was revving, the plans became significantly overfunded and if you went above the 120% level you didn't get a tax deduction. Union trustees would know that and when going into negotiations they would try to increase benefits with excess funds. The problem is when you have a downturn in the market and have already negotiated excess benefits that can't be reduced by law."

As James Morgan, vice president of collectively bargained compensation and benefits, Safeway, Pleasanton, Calif., told committee members in his testimony last year on the topic to the Subcommmittee on Select Revenue Measures, "It's important to be able to save for a rainy day," and not have to worry about tax deductibility problems.

Another issue in the underfunding equation is demographics. Jim Lowthers, president of UFCW local 400, Landover, Md., pointed to shrinking ratios among active workers to retirees. "Twenty years ago there may have been 10 actives for every retiree. Now there may be only three actives for every retiree. Contributions to these funds are based upon active participation. The liability grows considerably each year as you have fewer active workers and more retirees. It exacerbates the problem unless you have a good return."

Legislative Solution

Many companies that contribute to multi-employer plans are often clueless about the health and viability of these plans and they are often unaware of their own potential liability, especially if one of the plan sponsors goes bankrupt, observers said. For example, when Fleming filed for bankruptcy in 2003 other employers were required by law to step in and absorb the funding deficiency left by Fleming pulling out of its multi-employer trusts. The funding void left by Fleming was estimated to be over $100 million and spread over several multi-employer plans. Under bankruptcy law, the plans are unsecured creditors and receive at most only a few cents on the dollar.

Dexter of Mercer noted that shareholders who suddenly see companies they've invested in funding large liabilities due to the withdrawal of a participating employer are "not very understanding."

Both FMI and the UFCW support pension reform legislation that would help protect these plans. Through its Pension Task Force, formed in August 2004, FMI has worked to get its provisions for pension reform in the two bills - Pension Protection Act (H.R. 2830) and Pension Security and Transparency Act (S. 1783), which are under reconciliation by the House and Senate.

The legislation would create more transparency of such trusts and mandate that plan participants, including the employees, be provided with up-to-date information on the status of these funds.

The legislation would also create a warning-alert system to identify financially troubled multi-employer plans before it's too late. It would set in action funding mechanisms to increase the funds if the they fall below designated levels. Under the legislation, trustees must project seven years out, Motley noted. "It's a two-step process," he explained. "Take a look and if everything is fine then you don't have to do anything. However, if you see the trend line fall between 60% to 80% of the plan's funding requirement, then the plan falls in the yellow zone. Then, the next time contract negotiations come up there has to be proposals between the company and union on how to get the plan to a proper funding mode over 80%."

The anticipated target date for getting these bills reconciled and passed is early April. Motley doesn't foresee any problems.

"My only question is what date the bill will pass," said Kra of Mercer.

He said scrutiny from so many sectors is putting pressure on companies to provide more disclosure of their pensions. While it now takes digging to get information, Kra said, companies can do the same kind of back-of-the-envelop estimates that Moody's has done to assess their exposure. "How can a company ignore a liability that could be very substantial as a percentage of its net debt?" he asked.

Largest UFCW Contracts Expiring in 2006

(listed in order of expiration)

Chains: Region; UFCW Local No.; Number of Workers; Expiration Date

Kroger: Richmond/Norfolk, Va.; 400; 1,520; March 25

Meijer: Columbus, Ohio; 1059; 3,810; May 6

Kroger: Dayton, Ohio; 1099; 3,000; June 17

Multiple: Floral Park, N.Y.; 1500; 11,617; June 24

Stop & Shop: Upstate N.Y.; 1500; 3,616; June 24

Kroger: Little Rock, Ark.; 2008; 2,404; June 24

Jewel Foods: Milwaukee; 1444, 73A; 1,834; July 29

ShopRite: Uniondale, N.Y.; 1500; 2,062; Sept. 23

Multiple: New York City; 338; 11,429; Oct. 7

ShopRite: Ewing, N.J.; 56; 1,749; Oct. 31

"Multiple contracts expiring on the same day in the same region not listed separately.Source: United Food and Commercial Workers

Local Concerns

United Food and Commercial Workers locals from around the country seem to be fighting bigger issues than in years past, and they aren't just fighting the companies with which they are negotiating contracts. With Wal-Mart Stores and a national health care and pension crisis added to the usual mix of wage increases, benefits and job security, companies and unions are finding themselves in agreement that some issues are just too large to settle at the bargaining table.

This is a relatively light volume contract year for the UFCW with 46 contracts covering 65,009 workers around the country expiring. Compare that figure to next year when contracts covering more than 400,000 UFCW members will expire, according to Pat O'Neill, UFCW executive vice president and director, collective bargaining department, Washington.

"We'll have a lot of time to plan for 2007," he said. O'Neill assessed the mood of his membership as optimistic. "We've gotten through a difficult time and come through it. I think we are stronger for it."

SN interviewed UFCW local leaders and asked them about health care, a No. 1 focus of labor, and the Change to Win organization. Here's what they had to say:

Larry Hall, president, Local 1439, Spokane, Wash.

With health care a top priority, what solutions do you advocate?

If we keep going down the road we are going, we are going to need national health care.

The state of Washington has proposed a Fair Share Health Care Act, and we think it's very important. We have a statewide basic health care plan, and more Wal-Mart employees are on that plan, and also Medicare and Medicaid, than any other company. Our tax dollars are supporting those programs, and it's not fair to the rest of us.

What has been the impact of the UFCW joining Change to Win?

The concept isn't new; it's kind of repeating history, like when the AFL joined the CIO. The UFCW has granted us locally the right to join the organizations that we feel are useful. We are also making alliances with church groups and the Blue-Green Alliance, for example, which gives us a reason to work together and promote better community.

Brian String, president, Local 152, Atlantic City, N.J.

With health care a top priority, what solutions do you advocate?

We endorse a national program the covers everybody, not what the president and his administration are endorsing, which is health savings accounts that give tax breaks on any money you may be able to put aside for your own benefits. The main concern of my membership moving forward was containing the cost of health and welfare and not having any benefit co-pays levied upon them. We achieved that goal.

What has been the impact of the UFCW joining Change to Win?

It's going to re-energize all of us because focus has been put back on to how we organize the unorganized. The AFL-CIO got bogged down because they rely too much on politicians as opposed to getting out there and rolling up their sleeves and organizing the unorganized. It has brought about a spirit of community within the labor movement.

Jim Lowthers, president, Local 400, Landover, Md.

With health care a top priority, what solutions do you advocate?

The health care system in the U.S. is ruined. We need national health care. The problems with regard to costs and cost escalation at the bargaining table and for everyone in the country are no longer something that can be dealt with by employers and unions. We passed a law in Maryland that applies to large companies recently that says if you don't pay at least 8% of payroll to health benefits for your employees, then you have to pay the state the difference. There are 30 states currently contemplating this legislation.

What has been the impact of UFCW joining Change to Win?

Change to Win is a very forwarding-looking organization. Over the course of the next five to 10 years there will be a rejuvenation of the labor movement.

Scott Crowley, special projects, Local 338, Long Island, N.Y.

With health care a top priority, what solutions do you advocate?

Health care costs are increasing dramatically and the trend is for companies to push more and more costs onto employees. Other unions have done a two-tiered thing, where they give newer members secondary health care benefits, where they have to pay more and have higher premiums, but we don't want to do this.

What has been the impact of the UFCW joining Change to Win?

Change to Win has very dynamic leaders and we are excited to work with them. However, we are still expecting to work with AFL-CIO on local levels. We all have the same goals; we are just choosing different ways to achieve those goals.

Frank DeRiso, president, Local 1, Utica, N.Y.

How did your recent negotiations turn out with regard to health care?

Our members wanted to maintain what we have now in terms of health and welfare, and we were successful in all our goals.

What has been the impact of the UFCW joining Change to Win?

It is a situation where there are different beliefs, and none is right or wrong. Change to Win has ideas that are more aggressive and progressive in terms of membership. Hopefully, both organizations can continue to exist. We all have common goals. We are in the labor movement; that's why we're here.

Wendell Young IV, president, Local 1776, Plymouth Meeting, Pa.

With health care a top priority, what solutions do you advocate?

Health care benefits and costs are completely out of control. There is a lack of action in Washington; no one can settle this at the bargaining table anymore, because the problem goes way beyond the table. The impact is a national one. I'd love to see something like Maryland's Fair Share Health Care Act happen here in Pennsylvania.

What has been the impact of UFCW joining Change to Win?

I believe the split will make the labor movement as a whole a better organization, because the AFL-CIO has to continue to focus on politics, while Change to Win has an increased focus on membership.

MARIA TORTORETO