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May 24, 2016 | UPS Fears $3.8 Billion Liability Over Bankrupt Central States Pension Plan

Mike 'Mish' Shedlock

Mike Shedlock / Mish is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.

In 2007, UPS dumped its pensioners into the Central States Pension Fund, a fund now destined for bankruptcy.

As part of the collective bargaining agreement, UPS agreed to pick up future payments if benefits are cut.

That provision may cost UPS $3.8 billion or more.

Let’s backtrack and fill in some details.

In December, the Central States Pension Fund informed the US Treasury department that the fund would run out of money in 10 years at the current rate of $3.46 in pension benefits for every $1 it receives from employers.

The plan proposed pension cuts of up to 60%.

Also in December, UPS Called For Denial of the Rescue Plan.

UPS got it wish.

I reported on May 20, Rejected: Central States Fund Proposes 60% Pension Cuts, Treasury Dept Says “Not Enough”; 407,000 Affected.

The fund sent out this letter on May 20.

Dear Beneficiary

Central States Pension2

Click here for the entire “Dear Beneficiary” letter.

There is no plan now, except to let the fund make billions more in payments than it takes in, a sure guarantee the plan will have no assets 10 years from now (assuming 7% or so returns annually).

Dateline April 28: UPS Fears $3.8 Billion Liability

Please consider UPS Faces Up to $3.8 Billion Charge if Central States Benefit Reductions Approved.

United Parcel Service Inc., Atlanta, argued in an earnings presentation Thursday that the benefit reduction application by the Teamsters Central States, Southeast & Southwest Areas Pension Fund, Rosemont, Ill., is not legal.

The company, which withdrew from the $17.8 billion pension fund as part of a collective bargaining agreement with the International Brotherhood of Teamsters at the end of 2007, might also be required to pay between $3.2 billion and $3.8 billion in benefit payments if the benefit reduction is approved by the Treasury Department.

A “backstop agreement” in that CBA stated that in the event “at some point in the future if Central States ever lawfully cut benefits to that group, UPS would provide a supplemental retiree benefit,” UPS spokesman Steve Gaut said in a telephone interview.

Mr. Gaut said UPS also believes the benefit reductions laid out in the application are not legal under the provisions of that act. The MPRA imposed a tiered benefit reduction process specifically for the Central States plan. The UPS argues that the benefit reduction application disproportionally affects participants in the third tier, which comprises the UPS participants.

“The ordering rule that’s laid out in the (act) would indicate that there should be a progressive reduction of benefits starting at Tier I, then moving to Tier II then moving to Tier III,” Mr. Gaut said.

According to UPS, the average benefit reduction for Tier III participants is 53%, compared to 34% for Tier I participants and 29% for Tier II participants.

According to a January paper from the Congressional Research Service, Tier I includes benefits for participants that worked for employers that withdrew from the Central States pension fund without making the payments required to fully exit the plan and Tier III consists of the benefits for the UPS participants. Tier II consists of participants not in either group. There are 100,377 Tier I participants, 322,560 Tier II participants, and 48,249 Tier III participants.

UPS stated in its presentation it will pursue “all available legal remedies if the plan is approved.”

Be careful what you wish.

As noted, the plan was not approved. The Treasury department said the cuts were not big enough.

If UPS had a $3.8 billion liability before, what is the liability now?

Also consider …

Mike “Mish” Shedlock

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May 24th, 2016

Posted In: Mish Talk

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