The Hidden Pension Threat

John Moore is fighting to keep his company afloat. People no longer want to buy the gas-guzzlers sitting on his auto lot in Los Gatos, Calif., an upscale town that's home to several Silicon Valley pioneers. His sole supplier, General Motors (GM), is begging the government for aid. With sales down 35% over the past 12 months, the 59-year-old Moore, who as a teenager worked at the family-owned dealership, wonders if there will be a business to pass on to his son, Bret. Already, the recession has claimed 115 dealerships in the state, roughly 1 in 10.

But Moore's most pressing problem might be one that's hidden from plain sight: his employee pension plan. Moore's dealership is among the 300 or so companies that participate in the Automotive Industries Pension Fund, a so-called multi-employer plan that covers 27,000 retired and working mechanics in the Bay Area, including two dozen at his shop. The plan has $1.2 billion or so in assets, but needs $2.1 billion to pay pension benefits for current employees and retirees. To erase that shortfall, the plan's operators are debating whether to raise annual company contributions by 7.5%—a move that would further squeeze Moore's profitability. He has no way of escaping: If he were to sell or shut down the business, federal rules would require him to fork over $1.7 million to cover his company's share of the plan's deficit—a sum equal to the dealership's profits for the past decade. "I pray that the managers hit the lottery or their investments pay off," says Moore.

Amid the plunging stock market, much attention has been paid to the slipping fortunes of traditional single-employer pension plans, including the well-chronicled problems at Nortel Networks (NT) and Ford Motor. But lesser-known multi-employer plans may pose a more urgent threat to millions of rank-and-file workers, corporate managers, shareholders—and the overall economy. Operating in the shadows of their single-employer counterparts, multi-employer plans account for nearly a quarter of the $2 trillion in private pension assets, and include everything from big corporations such as supermarket giant Kroger and shipping titan United Parcel Service to small businesses operating on shoestring budgets (DIS).

In pooling together assets from many different corporations, a multi-employer plan should minimize the risk of any one company's not paying its pension tab, since it can tap other companies in the plan to make up for the shortfall. But something unexpected is happening now: As the recession grinds on, companies in a broad swath of industries, from transportation and manufacturing to food services and lodging, are going out of business and have stopped making their pension payments. That has left the remaining companies—healthy or not—with the burden of making up for the massive shortfalls. "The multi-employer plan is a great model as long as all of the companies stay alive and grow," says William D. Zollars, CEO of trucking giant YRC Worldwide, which participates in such plans. "But the way the current plans are structured, you not only pay for your employees but all the orphans whose employers have gone out of business."

To prop up multi-employer plans, companies will have to dip into profits, which could force them to tamp down salaries and bonuses, cut jobs, and slash capital spending. It's a vicious circle: The bigger the shortfalls in coming months, the more they will weigh on the already slumping U.S. economy—which will only make the pension situation worse.

PLUNGING PORTFOLIOS

At least some of the blame for the nation's pension woes lies with Washington, which has unwittingly tied the hands of companies with single- or multi-employer plans.