August 14, 2012
--- U.S.
corporate multiemployer pension plan (MEPP) obligations represent a drain on
cash flow, particularly for the U.S. supermarket sector, according to a Fitch
Ratings report. ---
MEPP contributions could, over the long term, grow at a rate
that cannot be fully offset by smaller increases in wage rates or health care
costs—potentially resulting in a creeping increase in overall labor costs,
Fitch said.
Most MEPPs are significantly underfunded. While this
liability is off-balance sheet, it is causing cash contributions to these plans
to increase over time. Among Fitch-rated companies with the largest ongoing
MEPP exposure, the top three were Safeway Inc., SUPERVALU Inc. and Kroger
Co.
Fitch noted there is the risk that a contributing employer
will become insolvent, resulting in a larger liability for the remaining
employers in a MEPP, and lead to higher required contributions. However, there
is little risk of a large, lump sum payment to cure an
underfunding.
From a credit standpoint, Fitch does not expect any
near-term rating actions resulting from MEPP liabilities. However, growth in
MEPP contributions due to funding shortfalls, which can be exacerbated by
employer insolvencies, could result in further downward pressure on
supermarket EBIT margins. Margins have already narrowed significantly in
recent years, and, over time, could result in rating
downgrades.
The full report, “Multiemployer Pension Plans in
Perspective,” is available here.
PLANADVISER staff