Multi-employer Pensions May Pose Credit Risks

Some companies may face downgrades as a result, says Moody's.

Moody’s Investors Service has revised how it will evaluate the under-funding of multi-employer defined-benefit pension plans and the liabilities it creates for some debt issuers.

The debt rater explained that it will consider a company’s share of plan under-funding to represent a long-term, debt-like liability and will adjust its interpretation of the company’s financial statements accordingly.

Moody’s said 62 companies that it rates contribute to multi-employer plans.

Multi-employer plans, popular in unionized industries, allow itinerant employees to keep their pension plans as they switch employers. Under current accounting rules, companies treat their contributions as an annual expense and do not have to disclose projections of their long-term obligations, which can fluctuate significantly. Companies that sponsor significantly under-funded plans are often in the construction, entertainment/printing, food/supermarkets, hotels/casinos, and transportation industries, according to Moody’s.

Moody’s has expressed concern in the past that the plans may soon saddle companies with higher payments to avoid a funding deficiency. The rating agency’s own study of 133 plans found estimated average funding of 83 percent, with total under-funding across the industries studied at about $49 billion. Some very large plans were only about half funded, the Moody’s study found.

Rated companies have opposed the change. United Parcel Service, the top contributor to such plans according to the Moody’s study, paid nearly $1.2 billion in 2004. UPS makes no internal projections for its long-term exposure, Norman Black, spokesperson for the shipping company told CFO magazine last May. “We do not view it as long-term debt; it is the cost of labor, which is short-term.”

“Just because the contribution is driven by union negotiations does not imply to us that there’s no long-term liability,” Greg Jonas, managing director at Moody’s, told CFO.

In its announcement Tuesday, Moody’s warned that some companies could see downgrades under certain circumstances. However, the rating agency also said it will consider rating actions only after discussion with the management of affected companies, and that it would incorporate any mitigating information those companies might provide.

Moody’s first proposed a methodology for evaluating the under-funding of such plans as a liability back in January. Its original methodology assumed that companies that sponsor multi-employer plans would bear 75 percent of the under-funding burden and that employees would bear the remaining 25 percent.

Moody’s said it now assumes that companies and employees will each bear half of the under-funding burden.

The rating agency also noted that contributions to multiemployer pension plans have been increasing in recent years, suggesting that companies and employees are responding to concerns about under-funding. Moody’s said that the 62 companies that it rates that contribute to multiemployer plans have, on average, increased their contributions 10.3 percent per year over the past three years.

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