New approach to Teamsters trucking companies’ pension withdrawal liability

After decades of uncertainty over millions of dollars of potential pension withdrawal liability, Teamsters union-covered trucking companies in multi-employer pension plans finally have some tangible financial rays of hope.
 
And that is good news for shippers, who stand to benefit from potential changes that will make it easier for surviving carriers in multi-employer plans to remain in business and prosper.
  
For decades, surviving carriers in multiemployer plans lived under the withering financial overhang of millions of dollars of potential liability because of the way those plans were structured. More than 600 large Teamsters-covered trucking companies have ceased operations since deregulation in 1980, with most belonging to multi-employer plans.

Because of the potential withdrawal liability, surviving carriers often had to choose between paying millions to get out of those plans or risk paying even more because of bankruptcies and other closures. Four years ago, UPS paid $6.1 billion to get out of the woefully underfunded Central States Pension Plan, the Teamsters’ largest multi-employer plan. UPS did so partially because of its unfunded pension liability in the Central States plan.
  
But now, because of a potential option that controls a carrier’s withdrawal liability, Teamsters-covered trucking companies may win a long-awaited change in pension liability calculations.
  
That’s the word from Herve H. Aitken, the Washington attorney from Ford & Harrison who is a multi-employer pension expert. He has been advising trucking companies of this potential sea change in the way trucking companies may be treated under new approaches in pension law.
 
In fact, Aitken compares multi-employer plans, long thought to be financially doomed because of changing demographics in the trucking industry, to a Phoenix, the legendary mythical bird that allegedly lived 500 years, and burned itself to ashes only to live for another period.
 
The changes began last summer when a New England Teamsters plan started this process that involved the Pension Benefit Guaranty Corp. (PBGC), the government agency that insures most pensions. The New England Teamsters plan agreed with PBGC to permit contributing trucking company employers to withdraw from the plan and re-enter the multi-employer pension plan under what is known as a “Direct Attribution Plan.”

Such a plan offers three benefits, Aitken said:
1-Current withdrawal liability is greatly reduced;
2-Employers are not liability for liability attributable to other employers; and
3-the New England plan agreed to reduce benefit accruals to the employers’ contribution level to fully fund the plan, with projections updated annually.
    
“The switch to a direct attribution plan will be a win-win-win—for employers, funds and Teamsters employees,” Aitken told LM. “Essentially, with respect to employers, it should provide additional long-term viability and security.”
  
The bottom line is carriers belonging to multi-employer plans could, for the first time in 30 years since deregulation, have no new withdrawal liability in Teamsters-covered plans. The Central States plan has submitted its application to the PBGC to establish the same type of “hybrid” direct attribution plan, although no final approval has been made.
 
To be sure, Central States is in poor financial shape. Its executive director, Thomas C. Nyhan, testified before Congress last year that Central States is facing an “unprecedented financial crisis” and could be insolvent within 10 or 15 years.
  
“It is in horrific financial shape,” Aitken says flatly.
  
That is because of changing demographics, the shift by shippers toward use of non-Teamster truckload carriers and poor returns from the stock market on Central States’ assets.
 
According to Central States’ internal documents, it took in $675 million last year in employer contributions but paid out $2.9 billion in annual benefits—an operating loss of $2.225 billion.

The mid-2011 financial report on the Central States Pension Fund shows that Central States has to make 11 percent return on investments to keep from going backward, according to its own independent financial counsel.
 
Central States took in $333 million in employer contributions for the first half of this year, and projects an annual income from employers of $677 million. This includes the reduced contributions from financially ailing YRC Worldwide, which suspended all contributions three years ago but resumed paying about one-fourth of what it used to contribute beginning last July.
 
Currently Teamsters in the trucking industry enjoy a “30-and-out” provision that allows them to retire on $3,000 a month pension after 30 years in the industry.
  
That means Central States’ payout of benefits is currently about $2.83 billion a year, more than four times what it gets from employers. This means the fund needs to make $2.2 billion on investment income, just to break even.
  
That is because of unfavorable demographics. Currently the fund has a 1-to-4 ratio of active workers to retirees, compare with a 4-to-1 ratio in 1980, the first year of deregulation. As of February 2011, the fund had 54,698 active workers, and 214,243 retirees.
  
As such, Aitken is advising trucking companies who are part of the Central States pan to consider joining the hybrid direction attribution plan because of the potential insolvency of the Central States plan in the next decade or so.
 
Teamsters for a Democratic Union, the dissident wing of the union, blames the Jim Hoffa administration for what it calls the “disastrous” decision to split the Central States fund a few years ago.

That allowed UPS, the largest and most profitable transportation company in the country, to pull out. That has resulted in the exodus of other companies, and lack of organizing by the union has not brought in new participants to the fund.
  
Central States earned $1 billion on investments in the first six months of this year, and thus assets only went down about $93 million, due to a good period in the stock market. Central States has 69 percent of assets in stocks so its fortunes are closely tied to overall economic conditions. Any dip in stock market returns would worsen the financial condition of the Central States plan, which has about $19.1 billion in unfunded pension liability.