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

Openmarket.org

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.

http://www.openmarket.org/2012/04/04

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