KANSAS CITY — An emerging development of considerable importance for the commercial baking industry recently drew the spotlight thanks to an announcement by the nation’s largest baker. Subsequent developments underscore the scope of what is unfolding and its potential impact across the baking industry.
Announcing the company’s fourth-quarter 2022 results Feb. 22, Grupo Bimbo SAB de CV said it recorded a one-time gain of 14.4 billion pesos ($734 million) in connection with the reversal of a balance sheet liability related to the severely underfunded Multi-Employer Pension Plan (MEPP). Bimbo said the provision was no longer needed because of expected special financing assistance in connection with the American Rescue Plan Act of 2021 (ARPA).
Days later, the potential scope of the MEPPs relief financing for baking came even more clearly into focus. On March 1, The Bakery and Confectionery Union and Industry International Pension Fund applied for Special Financial Assistance under ARPA totaling $3.8 billion. Since its inception in 1955, the baking fund has had nearly 2,000 employers participating and as of Jan. 1, 2021, it had 160 employers still participating, with 15,533 program participants still working.
In December, $36 billion of relief was awarded under ARPA to the Central States Pension Fund covering 350,000 Teamsters union workers and retirees. Several baking companies are participants in the Central States fund.
With roots dating back to the 1940s, multi-employer pension plans are collectively bargained and maintained by more than one employer together with a labor union. Commonplace across numerous unionized industries, approximately 1,400 MEPPs are currently operating, covering about 10 million participants.
Many MEPPs have been underfunded since the early 2000s because retirement fund returns failed to meet projections, reflecting, in part, lower-than-anticipated interest rates for many years. The problem became far more severe during the Great Recession of 2008, leaving several MEPPs dangerously underfunded.
Baking MEPPs suffered a double whammy during this period. The Bakery and Confectionery Union fund lost a third of its asset value in 2008, and the fund in short order fell from 93.4% funded to 76.2%. Four years later, the largest employer in the fund, Hostess Brands, which accounted for 24% of the fund’s contributions in 2010, filed for bankruptcy. Its withdrawal reduced the fund’s contribution base to 51 million worker hours in 2012 from 68.4 million in 2010. The events sent the fund into a downward spiral with the funded percentage falling as low as 51.6% by 2018. Despite steps taken to rehabilitate the plan’s health, the fund faced insolvency as soon as 2031. ARPA funding is intended to keep the Bakery and Confectionery fund, and all funds receiving ARPA assistance, solvent at least through 2051.
Precisely quantifying the potential impact on the baking industry is difficult. Still, what happened at Bimbo, which had been placing money in reserve to prevent disaster for its largest MEPP, offers a glimpse into the potential impact of rehabilitating ailing MEPPs. In one fell swoop, the MEPPs liability reversal added three quarters of a billion dollars, or about 14%, to Bimbo’s net equity as reported at the end of September. Together with contributions from strong earnings and gains from the sale of its Ricolino business, Bimbo’s net equity in the fourth quarter jumped by 20%, an amazing achievement. Bimbo said its total MEPP liability has fallen by almost 90%.
Even after the ARPA funding, statutory requirements associated with MEPPs remain in place. Bimbo and other baking companies that participate will continue to pay into the plans and face contingent liabilities that may be triggered in the event of disruptive withdrawals like that of Hostess Brands. Still, the funding almost certainly will avert serious financial problems participating bakers would face in 2031 if the Baking and Confectionery fund were to become insolvent. It now appears far less likely employers in the future will be obligated to pay both into insolvent pensions and new retirement plans necessary to attract and retain workers.
While appreciative of the potential impact of MEPP relief, baking executives are aware the intended beneficiaries of what is expected to be around $100 billion in government funding are union members facing impending benefit cuts, not companies participating in the plans.
“We’re just being dragged along in the Jet Stream,” one baker said.
Concerns have been raised that maintaining solvency through 2051 could leave plans underfunded in the distant future. The retirement consulting firm Mercer struck a hopeful tone on this point, noting conservative assumptions were used to calculate prospective funding returns, heightening the likelihood funds would remain solvent at least through 2051. Notwithstanding numerous concerns about the ARPA relief, the funding from the program is highly welcome to an industry that had for years been grappling with a seemingly intractable problem.