UPS SEEKS TO DELIVER OWN PENSION PACKAGEPosted On: Aug. 17, 1997 12:00 AM CST
ATLANTA-Why would an employer be willing to pay hundreds of millions of dollars to withdraw from underfunded multiemployer pension plans and then incur the expense of setting up its own pension plan?
That is the question benefit managers and others have been asking since United Parcel Service of America Inc.'s demand to withdraw from its union-sponsored multiemployer plans-at a price tag to the shipping company of $700 million in withdrawal liability payments-helped spur a strike by its 185,000-Teamster-represented employees.
The answer is one of benefit equity, say UPS benefit officials.
"UPS dollars should go to pay benefits of UPS employees," said Lea Soupata, senior vp of human resources at Atlanta-based UPS.
UPS itself said earlier this month that its $1 billion in annual contributions to the Teamster plans are being used in part to subsidize benefits of retirees who never worked for UPS. That is a reference to the situation-not an uncommon one in the delivery business-when other employers in Teamsters multiemployer plans have gone broke and the remaining employers have had to pick up the benefit obligations of retirees and employees of bankrupt companies.
Late last week, though, UPS hinted it might drop its demand to withdraw from the multiemployer plans, several of which would take a big hit to their contribution base if UPS pulled out.
While benefit and legal experts accept UPS' explanation of why the delivery giant wants to withdraw from the multiemployer plans, they also say the explanation is only a partial answer.
Money is what is driving UPS to try to get out of its multiemployer plans covering Teamster employees, some say.
"I suspect UPS has done an economic analysis and concluded its costs would be a lot less with its own plan," said Bill Ecklund, a benefits attorney and president of the law firm of Felhaber, Larson, Fenlon & Vogt in Minneapolis.
Tom Brand, a principal in the Chicago office of William M. Mercer Inc., added, "I assume they envision that they can get a lot more bang from the buck."
UPS' Ms. Soupata, though, said last week at a Washington press briefing that she couldn't estimate the cost of a new plan, noting that the company's annual costs would depend on such variables as investment return on assets contributed to the new plan.
In addition, while $700 million would be a whopping price to get out of a pension program, it could be a relative bargain for UPS compared with future costs if it believes more companies in the plan will collapse, leaving remaining companies with an even greater share of the burden of providing benefits.
"If you believe a plan is on a death spiral, the withdrawal liability may seem cheap" compared with what contributions could be later, added Bob Walter, a principal and benefit consultant with Buck Consultants Inc. in Secaucus, N.J.
In fact, UPS estimates that if it waits until 2002 to leave the multiemployer plans, its withdrawal liability tab could be as much as $2 billion, an analysis that obviously assumes the failure of more companies contributing to the multiemployer plans and a growing number of retirees collecting benefits.
Whatever the size of the numbers, the pension dispute, which along with UPS' growing use of part-time employees led to the strike, has an importance beyond UPS and its Teamster-represented employees.
"To the best of my knowledge, an employer of this stature has never sought to withdraw from a multiemployer plan. Whether UPS succeeds or fails, it could send a signal to other employers," Mr. Walter said.
The UPS situation illustrates problems facing some multiemployer plans and why some companies appear willing to pay such a high price to leave the plans.
The underlying premise of multiemployer plans is that they spread benefit risks of employers in the same or similar industries. If one company goes out of business, another is likely to spring up and join the multiemployer plan, keeping the number of employers contributing to the plan fairly steady.
But the decline in the percentage of employees enrolled in unions, a trend that accelerated over the past two decades, has at least somewhat undermined that theory. In 1983, for example, about 20% of the workforce belonged to unions. In 1996, that percentage was down to 14.5%, according to the U.S. Bureau of Labor Statistics.
"There are just not that many new employers who have organized workforces. There has been a migration of union work to non-union shops all around the country," said Mercer's Mr. Brand.
That decline in union membership is reflected in new enrollments in multiemployer defined benefit plans. For example, the number of employees covered in multiemployer plans plunged to 4.5 million in 1993, the last year for which information is available, down from 7.1 million in 1975, according to the Labor Department.
During the same period, though, total enrollment in the plans has remained nearly steady, declining just slightly to 8.1 million from 8.5 million. That reflects a growing proportion of retirees into the plans.
Indeed, in some multiemployer plans, such as the Central States, Southeast and Southwest Areas Teamsters Pension Fund-to which UPS is a major contributor-through 1995 the number of retirees and survivors receiving benefits and those eligible to retire slightly exceeded the number of active employees.
The Teamsters and other trucking industry pension plans have been hit especially hard by deregulation in the early 1980s, which led to the collapse of dozens of organized employers and the establishment of thousands of smaller delivery companies, whose employees have stayed out of the union, one trucking industry source said.
That unfavorable demographic trend and the prospect that the trend could worsen undoubtedly is behind UPS' efforts to get out of the Teamsters' pension plans, despite the stiff price, observers say.
"If an employer sees its risk as getting worse, the employer still has an incentive to pay the withdrawal liability fee and not be the last one out of the plan. UPS likely has enough data to conclude that it would be better off financially in a single-employer plan," Buck's Mr. Walter said.
But others note that it would be a mistake to conclude from the UPS situation that all employers are eager to rush out of multiemployer plans or that the plans are headed for a collapse.
While few new employers may be joining the plans, there has not been an exodus of employers already in the programs, especially from plans that are well-funded, Mr. Walter said.
And the plans themselves-thanks to the threat of the withdrawal liability and stronger investment returns-are better funded today compared with the past decade (see story, page 40).
"There has been a dramatic increase in the level of funding and a drop in unfunded benefits," says Robert Ridley, a principal and benefits attorney with the law firm of Farmer & Ridley in Los Angeles.
At the same time, the plans remain appealing to smaller unionized firms that lack the resources necessary to administer their own plans.
"They make sense for small employers who feel they can't run their own plan," said Tom Hendricks, administrator of the Southern California IBEW-NECA Trust Funds, a multiemployer plan in Los Angeles covering the electrical construction contractor industry.
For employees in transient industries, such as construction, where employees move from one company to another as contracts are won and lost, multiemployer plans-where benefits are port-able-always will be attractive.
"The primary advantage of the plans is their inherent benefit portability," said Dallas Salisbury, president of the Employee Benefit Research Institute in Washington.