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Managing the risks associated with acquiring multiemployer pension plans during M&A
In the context of a deal, a buyer of a business that participates in a multiemployer pension plan (MEP) is faced with a series of unique considerations, including balancing the economics of continued participation or withdrawal and evaluating the risk of changes to the legislative environment. Taxand USA provides an overview of MEPs and the associated risks to buyers.
A multiemployer pension plan is a retirement plan maintained under a collective bargaining agreement where many employers contribute to the same master plan. There are about 1,500 multiemployer pension plans in operation in the US. Uncollected liabilities from bankrupt contributing employers have left many of these plans with liabilities that substantially exceed the value of their assets. Furthermore, as the US union population continues to decline MEPs face difficulty increasing active enrolment that could aid their ability to recovery their funded position.
The Pension Protection Act of 2006 attempted to deal with the shortfall problem by requiring different contributions to MEPs that were in critical or red zone status (less than 65% funded) and endangered or yellow zone status (between 65 and 80% funded). Endangered plans are required to adopt a funding improvement plan and critical plans are required to adopt a rehabilitation plan requiring either or both increased contributions and reductions to future benefits. As of the latest reported figures in 2013, nearly 10% of MEPs are endangered and nearly 15% are in critical status.
To estimate the value of a target business, many buyers may look to a cash-flows model as an indicator of price. Unfortunately, information as to the expected future cash contributions to an MEP can often be limited. In lieu of detailed projections a buyer should contemplate the purchase of a business that participates in a red zone plan and consider a 10-20% increase in per annum contributions. Further risks include withdrawal exposure (a contingent liability until an employer ceases contributing to or withdraws from an MEP) and legislative changes. The Pension Protection Act which governs funding to MEPs has certain provisions such as the special rules for yellow and red zones that expire 31 December 2014. Many believe that the expiration of existing legislation may prompt Congressional review as to whether existing rules should be extended or a new framework should be established.
Also published in Thomson Reuters' Taxnet Pro, 5 May 2014
In many cases, the risks associated with acquiring an MEP may simply be chalked up to the cost of doing business. However, the associated risks may lead to very real and material costs. Even if a buyer can gain comfort that the risks of triggering a withdrawal in the near term are unlikely, the issue is likely to crop up again in future years if the MEP’s funded status does not improve.