The Private Equity for Families Blog

Too Toxic To Touch

We recently had an opportunity to look at an interesting manufacturing company that was a participant in an underfunded multi- employer pension plan. While the target company’s deficit was small, the group plan to which they contribute was significantly underfunded. We could not move past the deficit overhang and declined to participate in the sale process even though we liked the business and the parent company was prepared to indemnify us from future losses.

Lucky for us….. Last week The Economist wrote an article on the PBGC and the massive underfunded multiemployer liability insured by it. The news is not good if your pension comes in that multi-employer flavor.

The theory behind a multi-employer approach to pension planning within an industry made sense when the labor unions first proposed the arrangement in 1970s. Industries like printing, steel, trucking and mining created defined benefit retirement plans based on the collective premiums of all the unionized operations within the industry. That collective approach made sense when the number of industry participants was growing and while investment returns were high single digits every year. There was no unfunded deficit.

The landscape for multi-employer defined benefit plans is much different today. Almost all the multi-employer industries are losing participants and the survivors find they are jointly and severally responsible for the unfunded deficits of the group. The survivors cannot attract new capital because toxic underfunding and an increasingly aggressive Department of Labor scare even the most aggressive risk capitalists. According to The Economist– “Buttonwood: Betraying The Promise”, April 9th, 2016 the big problem in PBGC underfunding is the multiemployer piece:


$52 billion of the $76 Billion PBGC deficit is attributable to defined benefit multi-employer plans.  We are unwittingly underwriting another government folly.

The mismatch between what has been promised as a defined benefit and what can be paid is stark. Most plan participants will only get a fraction of what they expect unless The Pension Benefit Guaranty Corporation makes up the shortfall. However PBGC is also broke. It will take an act of Congress to pass the multi- employer promises of defined benefit to retirees who trusted the collective plan.

The real shame is employment. We would be interested in purchasing these industrial businesses and the existence of a union alone would not scare us away. The unfunded liability, however, is too toxic to touch. The result is another government program that is sold as pro labor that has the opposite effect. These jobs are going away forever and the US government is issuing the pink slips.

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Rob McCreary

Rob McCreary has more than 40 years of transactional experience as an attorney, investment banker and private equity fund manager, and has spent his career in building entrepreneurial organizations with successful track records Founder and chairman of CapitalWorks, he is responsible for developing and maintaining senior relationships with investors and portfolio governance.

This blog represents the views of Rob McCreary and do not reflect those of CapitalWorks or its employees. This blog is not intended as investment advice. Any discussion of a specific security is for illustrative purposes only and should not be relied upon as indicative of such security’s current or future value. Readers should consult with their own financial advisors before making an investment decision.

Private Equity for Families Blog | CapitalWorks Private Equity Cleveland Ohio

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