MEPP Liabilities a Concern for Contributing Employers

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.