Ding Dong – This Pension is Dead

Hostess Brands, Inc. shut down and I see a scenario where their union pension plans were the reason.  According to a news article there are two major unions at Hostess, IBEW Teamsters, which represents about 7,000 workers, and Bakery, Confectionary, Tobacco Workers and Grain Millers International Union (BCTGM) which represents about 5,000 employees.  I couldn’t find the IBEW plan but the 2011 5500 filing for the BCTGM Multiemployer Pension Fund (This Dead Plan) told me all I needed to know.

As of January 1, 2011 This Dead Plan had $5 billion in assets (valued at market and this number dropped to $4.5 billion by the end of 2011)  and $10 billion in liabilities valued using conservative assumptions (i.e. a much lower interest rate than was used for funding since PPA’06 tightened up the rules for single-employer funding but left actuaries with discretion when it comes to these union plans).  $155 million in contributions was coming in annually and $550 million was going out in benefit payouts plus another $27 million in administrative fees*.  70% of the $116,708 participants were either retired or inactive leaving the remaining 30% to shoulder the contribution load.  Hostess Brands, Inc. accounted for about 15% of active participants and plan contributions and was obviously looking to cut costs but then they hit a wall that is the Multiemployer Pension Plan Amendments Act of 1980 (MPPAA).

What MPPAA created was a bankruptcy machine that leaves employers participating in underfunded Multiemployer Defined Benefit Plans little other choice. Hostess was paying $22 million in contributions annually into This Dead Plan and wanted out.  What they would have found is a draconian barrier called withdrawal liability which places the entire burden for making up shortfalls on employers who were silly enough not to jump ship earlier and allows the union very favorable terms for calculating this liability.  My guess is that Hostess would have needed to come up with a billion dollars to be able to walk.

In this rigged game folding up was the only sensible option.  Incidentally, for those  who dabble in short selling, the other employer participants in This Dead Plan, according to their Schedule R, are currently BBU, Inc. , Kraft Foods Global, Safeway Stores, and The Kroger Company.

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* Check out the Schedule C for a full list of the leeches which include the actuarial firm getting $580 thousand and about $4 million in salaries for the people working at the union.

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PS: mpc made a good point in her blog today about union officials themselves  probably being covered under a Defined Benefit Plan that is well funded.  I did some checking and that is the case.  The BTCGM Union does maintain a plan for their salaried employees and for 2011 it’s 100% funded with an average benefit value per participant of $400,000.  They also have two additional 401(k) plans – one for salaried employees and one for staff though they don’t make company contributions into either of those.  I’d be curious to see how they pass coverage for their DB plan with 15 active salaried employees and maybe 20 staff excluded (union-status?).  And it looks like all salaries for the workers in the union office are paid out of the The Dead Plan and they get paid pretty well –  $2.7 million divided by 15 salaried employees comes to $180,000.  $1.3 million divided by 20 staff comes to $65,000.