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Small Business Digest


Union Pension, Healthcare Funding Troubles Starting To Affect Small Firms

These are lean times for many union pensions and their troubles are starting to affect many small businesses.

With the growing drain on pensions administered by union locals, particularly as retirees live longer and healthcare costs are rising, locals across the country are demanding additional funding from companies.  In many cases, these demands are falling heavily on smaller firms.

In New Jersey, many smaller meat and provision companies are reeling from the demands from the trustees of the United Food and Commercial Workers (UFCW) Local 174 pension plan for tens of millions of dollars to pay retiree benefits.

Last December, these retailers and wholesalers received letters demanding up to $1 million in additional contributions to the unions welfare fund.

The problem stems from high growth in fund assets in the 1990s, which in turn fueled higher benefits which cannot be sustained as returns have subsided.  Coupled with declining union membership, these pressures are forcing many unions to take a hard look at there pension plans.

These problems are not limited to New Jersey but are spreading across the country.

Last year, Congress passed a law to avoid pension fund insolvency by giving trustees the power to act well before a crisis arises.

The law, most of which takes effect in 2008, labeled funds with less than 80 percent of needed assets as "endangered."

And it said those with less than 65 percent of needed assets are in "crisis," depending on other financial factors.

Under the law, plans in crisis could reduce the benefits of some plan participants or increase the employer contribution by 10 percent.

The problem is particularly acute in pension plans that cover multiple employers within specific industries such as the meat and provision sector reported by the Record.  The auto and airline industries are also particularly vulnerable.

Standing behind the pensions is the Pension Benefit Guaranty Corporation (PBGC), a government body that assumes pension liabilities when plans fail.  It is funded by contributions on a per member basis from other pension plans but is, itself seriously underfunded against future obligations.

Smaller firms such as those reported by the Record are often hit with high one-time charges, in the case of four companies, more than a million dollars.

But funding shortfalls are often serious, and those in trouble have only two ways to get out of it: increase income or reduce benefits.

Legally, plan trustees can cut expenses by reducing the benefits that working participants will accrue upon retirement, said Jim McKeogh, a Pennsylvania actuary who headed a committee on union pension plans for the American Academy of Actuaries.

But the trustees can't increase a fund's income, he said. That's the responsibility of employers, who, like Mayer, agreed in union-negotiated contracts to pay for the employee retirement benefits and to make a monthly contribution for each worker.

"The employers are the ultimate," McKeogh said. "They are on the hook."

And the funds have been further depleted by other problems.

One is that some funds estimate the future cost of retiree benefits using lifespan assumptions from the 1970s and 1980s, said Steven Schenkel, a managing director of JH Cohn, an accounting firm in Roseland, NJ, according to the Record.

"You are outliving what you were supposed to," he said. And that means pensions pay out more than anticipated.

Dwindling union representation is another problem.

According to the Record, Local 174 fund, for instance, had just 969 working participants in June 2005, when it filed its latest annual report with the IRS. The workers accounted for about 14 percent of the 6,759 people enrolled in the plan.

But nearly 64 percent of the plan participants were drawing retirement checks, the report shows. As a result, employers paid $2.1 million into the fund, but it paid out $17.8 million to retirees.

With assets of $138.4 million, the fund was 62 percent funded.

The trustees want to freeze the fund so that no new members can join and existing members' benefits do not increase, the letters say.

In truth, retirees such as Swoboda probably would be affected only in extreme circumstances. That's because the government supports insolvent pension plans by providing funds to meet retiree obligations.

Still, if that happens, benefits to some plan participants would be cut by 25 percent, while many would be unchanged.

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