Multiemployer Pensions, the Tragedy of the Commons, and the “Last Man Standing” Rule

by Ivan Osorio on April 4, 2012

in Bailout Watch, Economy, Employment, Labor, Regulation

The “tragedy of the commons,” as described by the late ecologist Garrett Hardin, generally refers to the depletion of a finite resource caused by individuals rushing to take as much of it as possible before others do the same. In the case of multiemployer pension plans, it aptly describes the perverse incentive for individual companies to contribute less than needed to keep plans fully funded.

While corporate pensions have recovered somewhat since the onset of the financial crisis, multiemployer plans remain dangerously underfunded. “According to BNY Mellon Asset Management the funded status of the typical U.S. corporate pension plan stood at 76.2 percent at the end of February,” reports Institutional Investor. “The story is totally different, however, for multicompany plans. A new report issued by Credit Suisse Securities found the funding levels for these plans currently stands at a disturbing 52 percent.”

One reason pension underfunding has become a major issue is a change in accounting rules by the Financial Accounting Standards Board (FASB), which now requires firms to disclose multiemployer plan liabilities. For an individual company, those liabilities can be much greater than what it owes its own employees, due to the “last man standing” rule, under which multiemployer plans operate. Under this rule, every company in the pension plan is responsible for all pension liabilities of every other firm in the plan. Thus, firms that go out of business leave their liabilities behind for those still left in the plan.

The moral hazard in this arrangement is obvious. Lawmakers and agency officials who want to pursue real pension reform should look for ways to disincentivize firms joining multiemployer plans. That is bound to run into opposition from labor unions, for which the promise of a secure retirement provides a good way to attract new members. The problem is that multiemployer plans, as currently construed, are not sustainable, so the prospect of a secure retirement based on them is a mirage.

The new FASB reporting rules are a good first step. By making pension liabilities visible to investors, it gives companies good reason to address them.

Yet the dangerous nature of multiemployer plans should be reason enough not to join them. Credit Suisse warns, “Keep in mind that larger companies could end up taking on more of the multiemployer burden as the ‘last man standing’ in the plans, if smaller companies were to fail.”

Finding out who that “last man” would be is a game no one should have to play. The “last man standing” rule needs to go.

For more on pensions, see here.

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