Found this on a message board in yahoo financial s in the yrcw stock.
YRCW: Central States Back to "Critical Status" [YRCW081908b_160302]
Analyst(s): William H. Fisher
[Industry Classification: Business & Industrial Services/Logistics Services]
Last week, the board of trustees of the Central States pension plan provided an updated net asset position for 2Q08. As of June 30, the plan held $23.7 billion in total net assets, down 11.4% or $2.2 billion from the beginning of the year. Recall, these figures include the $6.1 billion UPS (UPS/$65.37/Strong Buy) paid to exit the plan at the end of 2007. While actual investment returns are difficult to derive (as the plan pays out roughly 7% of its assets each year net of contributions), the drop in assets over 1H08 was clearly a function of the weak equity markets and are weighing on the fund's solvency. Again, given the RPA 94 liability (i.e. the liability used to calculate the fund's funded status) is calculated at the end of the year, the aforementioned statement does not mention liability levels. That said, in a significant change of rhetoric, the board of trustees noted that on March 24, 2008 that the fund's actuary certified the pension fund to be in "critical status."
On the heels of the plan being deemed "critical status," by law (i.e. the Pension Protection Act of 2006) the plan must develop a "rehabilitation plan" to improve the funded status. In a broad outline, the "rehabilitation plan" contains two separate courses of action: the "Primary Schedule" and the "Default Schedule." The Primary Schedule requires each contributing employer to agree to five years of 8% annual contribution increases in order to maintain current benefit levels. The Default Schedule calls for the reduction of certain "adjustable benefits" (i.e. all benefits other than contribution based) coupled with 4% annual contribution inflation. If in 180 days the bargaining parties have not chosen a course of action, the default schedule will be imposed as a matter of the law. To note, of the parties who have voted, some 99% have voted for the Primary Schedule.
In June, two companies (Performance Transportation Services and Alvan Motor Freight) encompassing over 1,200 employees (roughly 1.3% of active participants) filed for bankruptcy. Again, due to the nature of the multi-employer plans, the companies "left standing" are liable for the employees' pensions of companies that have failed before them. Again, we view this as a game of "musical chairs" that you do not want to win, as failures only prove to reduce contributions though still require substantial long-term liabilities for the remaining companies.
The Bottom Line:
1.) The Central States plan continues to be in "dire straits" despite the huge cash infusion from UPS in late 2007. The weak equity markets, low interest rates, a very high 7% net payout ratio, ongoing company failures, and continued likely hour cuts at YRC Worldwide continue to significantly weigh on the plan's solvency. Keep in mind that hours worked are the funding "unit," thus YRC Worldwide's whopping 12% decline in 2Q08 volumes is likely driving a similar hours worked decline for the largest company in the fund.
2.) For the first time benefit cuts have surfaced as a key possibility in the rehabilitation of the Central States plan. Collectively, we surmise that benefit cuts could become the remedy of choice in the future, and our view continues to be this trend could prove to materially disrupt morale and service.
YRCW: Central States Back to "Critical Status" [YRCW081908b_160302]
Analyst(s): William H. Fisher
[Industry Classification: Business & Industrial Services/Logistics Services]
Last week, the board of trustees of the Central States pension plan provided an updated net asset position for 2Q08. As of June 30, the plan held $23.7 billion in total net assets, down 11.4% or $2.2 billion from the beginning of the year. Recall, these figures include the $6.1 billion UPS (UPS/$65.37/Strong Buy) paid to exit the plan at the end of 2007. While actual investment returns are difficult to derive (as the plan pays out roughly 7% of its assets each year net of contributions), the drop in assets over 1H08 was clearly a function of the weak equity markets and are weighing on the fund's solvency. Again, given the RPA 94 liability (i.e. the liability used to calculate the fund's funded status) is calculated at the end of the year, the aforementioned statement does not mention liability levels. That said, in a significant change of rhetoric, the board of trustees noted that on March 24, 2008 that the fund's actuary certified the pension fund to be in "critical status."
On the heels of the plan being deemed "critical status," by law (i.e. the Pension Protection Act of 2006) the plan must develop a "rehabilitation plan" to improve the funded status. In a broad outline, the "rehabilitation plan" contains two separate courses of action: the "Primary Schedule" and the "Default Schedule." The Primary Schedule requires each contributing employer to agree to five years of 8% annual contribution increases in order to maintain current benefit levels. The Default Schedule calls for the reduction of certain "adjustable benefits" (i.e. all benefits other than contribution based) coupled with 4% annual contribution inflation. If in 180 days the bargaining parties have not chosen a course of action, the default schedule will be imposed as a matter of the law. To note, of the parties who have voted, some 99% have voted for the Primary Schedule.
In June, two companies (Performance Transportation Services and Alvan Motor Freight) encompassing over 1,200 employees (roughly 1.3% of active participants) filed for bankruptcy. Again, due to the nature of the multi-employer plans, the companies "left standing" are liable for the employees' pensions of companies that have failed before them. Again, we view this as a game of "musical chairs" that you do not want to win, as failures only prove to reduce contributions though still require substantial long-term liabilities for the remaining companies.
The Bottom Line:
1.) The Central States plan continues to be in "dire straits" despite the huge cash infusion from UPS in late 2007. The weak equity markets, low interest rates, a very high 7% net payout ratio, ongoing company failures, and continued likely hour cuts at YRC Worldwide continue to significantly weigh on the plan's solvency. Keep in mind that hours worked are the funding "unit," thus YRC Worldwide's whopping 12% decline in 2Q08 volumes is likely driving a similar hours worked decline for the largest company in the fund.
2.) For the first time benefit cuts have surfaced as a key possibility in the rehabilitation of the Central States plan. Collectively, we surmise that benefit cuts could become the remedy of choice in the future, and our view continues to be this trend could prove to materially disrupt morale and service.
Oh, God. One piece of good news after another.
