“Companies that fail to fully fund their pension plans aren’t punished…”

hostess cupcakeI’ve been poking around the web, trying to figure out why news reports are ignoring that eight of the top 10 creditors in the Hostess case are pension funds. I’ve also been trying to figure out which government agency has oversight and why the company has been allowed to ignore its contractual obligation to its employees.

Then I found this piece from McClatchy, March 2011:

The little-known federal Pension Benefit Guaranty Corp. insures roughly 27,500 corporate defined-benefit pensions, covering 44 million U.S. workers…

The PBGC insures both single-employer plans offered by, say, a large manufacturer, and multi-employer plans, where many companies in a given industry collectively sponsor retirement plans. As of Sept. 30, single-employer plans insured by the PBGC collectively had a deficit of $21.6 billion, and multi-employer plans were in the red by about $1.4 billion.

At least one of the union pension funds in the Hostess case is a multi-employer plan.

When a corporation fails, the PBGC takes over its defined-benefit pension plan. The cost of paying the plan’s beneficiaries is supposed to be covered by premiums collected from businesses insured under the federal program…

The GAO, the investigative arm of Congress, said the PBGC can’t adequately manage its risks because it “cannot decline to provide insurance coverage or adjust premiums in response to actual or expected claims exposure.”

…current PBGC premiums spread the cost among all participants, but effectively allow irresponsible companies to be subsidized by responsible ones.

Since companies that fail to fully fund their pension plans aren’t punished, they enjoy an implicit government backstop.

Imagine for a moment that you’re an insurance company. You can’t charge variable rates based on risk. And you can’t terminate a policy for lack of compliance. That’s what the PBGC sounds like.

According to a 2010 GAO report, “U.S. multiemployer plans have not been fully funded in aggregate since 2000.” In 2009, 68 percent were less than 80 percent funded.

It sounds as though the U.S. Department of Labor should have some oversight. If any of this failed-to-pay-into-pension-fund commitment was money withheld from employee paychecks (ie, self-funded) … then Hostess should be strung up because it is “criminal” to “misapply employee contributions to cover business expenses.” There is at least one Hostess employee who has asserted publicly that this is the case – that self-funded pension payments were not forwarded on to the union pension.

         

18 Comments

  1. nice digging! interesting info indeed

  2. Kathy, if I understand you right you’re wondering how pension funds could become Hostess creditors? It’s hard to imagine them loaning Hostess money, and as you suggest for Hostess to renege on contributions would be a serious breach.

    I don’t know the answer, but I’ll guess it happened the same way state and municipal pensions got under water. The estimates of what contributions would be needed to fully fund them proved too optimistic, as health care costs soared and investment returns slumped.

  3. Thanks ShannonLeee — zusai, not headed into moral hazard zone.

    Dr. J – I think that’s two different issues. A pension fund can be underfunded because its investments aren’t performing as projected. But in this case, Hostess has stopped making payments into the pension funds. That’s documented in enough different news stories as to make it sound like a fact. :-)

    But you don’t get almost $1 billion behind in a fund where you are supposed to pay in $100M a year “overnight”. That’s one fund, the largest (the bakers). My question is about the $100M. Is that the company contribution to the fund (the “matching” part) or does it include the employee contributions, as alleged by a baker’s union employee.

  4. Its hard to get solid information on a lot of that as Hostess is currently a private company. I’d like to find out how their profit margin is minus the debt payments, and to see where the debt has actually come from. They’ve had a rough last couple of years but Hostess was doing fairly solid buiness over $2.5BN in revenue.

  5. Kathy, I bring up moral hazard because I think we need to consider that this program meant to help workers may instead be the honey attracting hedge funds wanting to transfer wealth from the taxpayer to themselves.

    “Some investors like Wilbur Ross of WL Ross & Co. even appear to have made a career of buying up companies that have saddled PBGC with billions in claims.”

    http://www.thestreet.com/story.....spers.html

  6. Hi, Slamfu – roger that. How does one get one’s hands on bankruptcy documents – are they public?

    Hi, Zusai — ah, that angle. You’re right. When I have a little time, I want to get to know PBGC a little better. If you find articles, please send them my way. It’s much bigger than Hostess and probably wasn’t even a glimmer in anyone’s eye when Congress set it up in the early 70s

  7. One of the problems with multi-employer plans is that in shrinking markets where companies are going out of business the remaining companies are forced to shoulder more and more of the burden. If Hostess were only trying to fund pensions for it’s own employees then it’s cost would be 25 bil a year instead of over 100 mil. Also the non payment issue is overworked to try and create a “bad guy”. Hostess stopped paying in nov saying without changes they would forced to file for bankruptcy. Well they did in jan after which all their finances have been overseen by the courts. Now as to “getting away” with not funding pension plans. Who is supposed to do what? Sure it’s a contractual obligation but all that means is they own the pension money. The pension fund would be the one to take legal action no one else because it’s purely a civil matter. As to the taking of the employees money, I do consider that to be wrong morally but unfortunately it was allowed by contract for the company to “borrow” those pension funds. That’s right the contract the union signed gave the company the authority to borrow that money.

  8. Also worth noting that the bankruptcy judge has forced the two sides into mediation that could possibly advert a liquidation of Hostess.

  9. “it was allowed by contract for the company to “borrow” those pension funds. That’s right the contract the union signed gave the company the authority to borrow that money.”
    Can this possibly be allowed by PBGC? If so, I don’t see any downside for them to have done this except for the taxpayer. If borrowing the money helps save the company, that a plus. If the company goes bankrupt despite borrowing the money, no loss because of the PBGC insurance. The union needs have a reason to act as a steward for the pension fund.

  10. Well part of the deal with the teamsters that the bakers turned down would have given the unions 100 mil in guarantied debt. Right now they are towards the back for getting paid in bankruptcy. Guarantied debt would put them at the head of the line. So even if the company would go under latter, which in all fairness the bakers union has said they believe would happen, the unions would still get something out of this deal.

  11. Eellis, So are the borrowed funds outside the scope of what PBGC would guarantee?

  12. Just a guess but I would assume that PBGC insures the benefits individuals receive not what any individual company places in it. Most likely PBGC would only get involved if Hostess quits paying it’s “insurance”.

  13. EEllis — Hostess owes almost a billion dollars to the baker’s union. You don’t get to a billion dollars in debt by not making one $100 million ANNUAL payment (according to press reports).

    Can you point me to sources that talk about Hostess “borrowing” this pension money from the unions?

    The problem with PBGC, as I read it, is that it can’t charge different insurance rates and it seems to have no hammer if a company stops paying.

  14. Sorry but there seems to be a shortage of facts here. I certainly don’t have them all either. I am almost willing to bet money that what happened is that its looks like the company didn’t pay into the pension fund the full amount required for it to meet its current and future obligations. Now that’s its gone under the union is after the money that wasn’t paid into the fund. The issue is how much the pension plan is owed by the now defunct company, assets will be liqudated and who is owed what will be determined.

    The problem is not unique to this company, there are many plans out there that are underfunded. I read where GE is underfunded to the tune of 25 billion. The big problem is that when these funds where set up assumptions were made about the rate of return the invested would earn. Over the last 15 years these funds haven’t earned what was assumed so a growing funding shortage exists.

    You could certainly argue that the government should get tough on companies that are underfunding. There is a risk that taxpayers could end up picking up the tab for underfunded pensions from failed companies.

  15. Hostess owes almost a billion dollars to the baker’s union. You don’t get to a billion dollars in debt by not making one $100 million ANNUAL payment

    First Hostess doesn’t, didn’t make annual payments, they were monthly. My understanding is they didn’t fund the pensions for two months and then they filed for bankruptcy. When Hostess filed for bankruptcy in 2004 they had over 2 bill in unfunded pension liabilities. Why would it of gotten any better? By they way when it’s said that they owe 1 bill what that means is it would cost them 1 bill to fully fund the MEP so they could exit not that they had to of personally underfunded anything themselves. I’m sure they have since it’s been well over a year since they have contributed to the funds but any employer that contributed to the fund technically has the same liability. You just can’t get the money out of them.

    I am almost willing to bet money that what happened is that its looks like the company didn’t pay into the pension fund the full amount required for it to meet its current and future obligations. Now that’s its gone under the union is after the money that wasn’t paid into the fund. The issue is how much the pension plan is owed by the now defunct company, assets will be liqudated and who is owed what will be determined.

    The Moderate Voice (http://s.tt/1uc8F)
    Not really. Sure Hostess underfunded the pension in large part to it being a MEP muti-employer plan where many companies paid into one fund to provide pensions. With many companies having gone out of business or pulled out of the plan due to bankruptcy the 1 bill is what it would take to currently fund the plan up to date so they could withdraw not not what they didn’t pay. If Hostess goes under and fails to pay into the plan then automatically the other companies who may be current will owe the fund a billion dollars, any company who is in the plan would have to pay that bill to leave the plan unless they get the union to approve them doing so. Of course since that “debt” is unsecured and Hostess owes a crapload of secured debt the pension probably will get little if anything. One of the reasons the current offer included 100 mil of secured debt to the unions because it the company failed they would then be at the front of the line for the 100 mill instead of near the back as they are now.

    You could certainly argue that the government should get tough on companies that are underfunding. There is a risk that taxpayers could end up picking up the tab for underfunded pensions from failed companies.

    But how would you do that? If the company has money you can sue them because it’s a real debt but you are not talking about healthy companies or there wouldn’t be a problem. Any attempt to get the amounts you want would just drive more companies under causing ever greater pension issues.

  16. EElis, the pension funds would be made good PBGC in any event. The problem is companies using the bankruptcy laws to off load pension obligations to PBGC. The underfunding of these plans is widespread even with our largest and most profitable companies and the risk to taxpayers for picking up the pieces if this falls apart is real. But don’t worry the government enacted new laws changing the rules that will make all the underfunding go away next year. Also premiums paid to the PBGC aren’t based on risk and way well below what they would be in the real world. The government should step in to tighten things up but they seem intent on doing the opposite and leaving taxpayers to hold the bag when this blows up.

  17. Forgot to add that the new rules allow the companies to cut the amount of funding even further. Have the obligations to retirees been cut, no, but the risk to taxpayers has increased significantly.

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