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Coal Companies Get Reprieve on Pension Costs

Crushing liabilities and collapsing coal prices have prompted the administrators of an ailing pension fund that covers about 100,000 coal-industry workers and retirees to scale back plans for a big increase in contributions from member companies.

The United Mine Workers of America 1974 pension plan has asked companies for a much smaller increase to remedy its “critical status,” the federal government’s label for multiemployer pension plans in dire financial condition, according to people familiar with the matter. The plan is underfunded by about $2 billion, the union said.

The pension plan’s troubles stem in part from a long-term slump in the coal industry, which is struggling as power plants switch to cheaper natural gas and as demand falls for the type of coal used in steelmaking

The plan will require coal companies and other members to increase contributions by 10%, to $6.05 per union employee per hour worked, and maintain that rate until 2027, said a spokesman for Murray Energy Corp., the plan’s largest participant. Benefit cuts for future retirees also are planned.

A previous plan called for contributions to increase in stages from a minimum $12.50 in 2017 to as much as $26.50 as early as 2022, according to regulatory filings.

“There is no way at this point to be able to work your way out of this,” said union spokesman Phil Smith. “You can’t make enough money out of investments in the market to do that.” The union declined to comment about details of the plan.

Pension specialists say keeping a lid on contributions may be the only way to skirt the risk that a much bigger increase spurs member companies to withdraw from the plan in large numbers, which could lead to the plan’s failure and a sharp reduction in benefits for current retirees. But the smaller increase likely won’t restore the plan to a healthy enough state to ensure future retirees get the benefits they have been promised, they said.

“It does sound like to me that there is nothing the remaining employers could do realistically that could make this plan financially solvent,” said Chuck Wolf, a labor and pension specialist at law firm Vedder Price in Chicago. “It’s just a very sad situation.”

Several companies that pay into the United Mine Workers plan are struggling, and investors that buy and sell distressed debt are monitoring the pension situation. Patriot Coal Corp., which emerged from Chapter 11 bankruptcy protection in 2013, is working with restructuring advisers, The Wall Street Journal previously reported, and Walter Energy Inc. WLT -1.55 % this month skipped a debt payment as it negotiates with creditors.

The pension woes also are weighing on some coal companies that aren’t in dire financial straits. Murray Energy disclosed details about the pension agreement while marketing a bond offering to finance its investment in another coal operator, according to investors familiar with the pitch. Investors said the rate deal assuaged concerns about buying Murray’s bonds.

A Murray Energy spokesman said the plan “consists of reasonable measures designed to forestall insolvency” of the United Mine Workers pension. “Larger contribution rates would force many coal companies into bankruptcy, which would severely weaken the plan,” he said.

The dilemma facing the coal plan is a familiar one in other troubled industries. Multiemployer plans must walk a fine line between increasing contributions and driving members to scale back union-run operations or go out of business, which can create a domino effect as remaining member companies are saddled with increased obligations.

These are big concerns for current and future retirees. For the 12 months ended June 30, 2014, the United Mine Workers plan paid $609.8 million in benefits, dwarfing its $105.5 million in employer contributions, according to an actuarial report reviewed by the Journal.

Were more union mines to close, “it is likely that the 1974 pension trust would enter what is popularly known as a ‘death spiral,’ where declining production would force the remaining producers to contribute at even higher hourly rates, which would in turn force more mines to close,” said Seth Schwartz of consulting firm Energy Ventures Analysis Inc., who testified last year before the Idaho Public Utilities Commission.

Funding crises can cause member companies to exit multiemployer plans in large numbers, according to an official with the Pension Benefit Guaranty Corp., a U.S. government agency that backstops pension plans.

The agency guarantees pensioners receive some of their promised benefits if the funds collapse, but it caps payments at a maximum level that typically falls short of what had been promised by funds. The agency’s safety net for multiemployer plans is itself overburdened and likely won’t have enough money to back up its guarantees within a decade, according to a report the agency issued last year.

The United Mine Workers plan has roughly 12 retirees for every active worker, an unsustainable level, said Mr. Smith, the union spokesman. A 16% investment return helped boost its assets to a market value of $4.16 billion as of June 30, 2014, from $4.09 billion a year earlier, according to a report reviewed by the Journal, far from enough to close the $2 billion funding gap.

The plan’s woes have attracted attention from the White House. The Obama administration’s 2016 budget proposal requested that Congress transfer federal funds to the pension agency for the purpose of protecting the United Mine Workers plan’s long-term solvency, one of several budget requests designed to aid the coal industry. Under the proposal, such government assistance would continue until the plan is fully funded.

Legislation enacted last year to stave off a rash of pension failures also may offer relief, some observers said. The Multiemployer Pension Reform Act of 2014 allows struggling plans to seek a reduction of benefits to restore their financial health. It isn’t clear whether the United Mine Workers plan will take advantage of the new law.

source: http://www.wsj.com