DISCLOSURES ABOUT AN EMPLOYER S PARTICIPATION IN A MULTIEMPLOYER PLAN

Transcription

1 DISCLOSURES ABOUT AN EMPLOYER S PARTICIPATION IN A MULTIEMPLOYER PLAN COMMENT LETTER SUMMARY Overview 1. The comment period for the September 2010 proposed Accounting Standards Update, Compensation Retirement Benefits Multiemployer Plans (Subtopic ): Disclosure about an Employer s Participation in a Multiemployer Plan (the proposed Update), ended on November 1, As of February 28, 2011, 328 comment letters were received, which are summarized below. Respondent Profile Type of Respondent Number Preparer 143 Industry/Professional Organization 80 Accounting Firm 43 Pension Fund 18 Actuary 10 Individual 10 Law Firm 10 Other 8 User 6 Total 328 Page 1 of 17

2 2. The majority of respondents do not support the proposed Update. Of primary concern to most respondents is the proposed requirement to disclose the estimated amount of a withdrawal liability even when withdrawal from a plan is not at least reasonably possible. Although most respondents acknowledged deficiencies in the current reporting requirements for an employer s participation in a multiemployer plan, preparers and users generally oppose the extent of the provisions in the proposed Update. Scope 3. The proposed Update would expand the disclosure requirements in FASB Accounting Standards Codification Subtopic for all nongovernmental entities that participate in a multiemployer plan. The proposed Update would not amend the guidance for recognition and measurement for an employer s participation in a multiemployer plan and also would not change the requirement that an employer apply the provisions for contingencies in Topic 450 if an obligation related to withdrawal from a multiemployer plan is either probable or reasonably possible. 4. Respondents who commented on the expanded disclosures in the proposed Update highlighted the following general concerns: Auditability Volume of new disclosures Timeliness of information Cost concerns Potential harm in bargaining process. Auditability 5. Several respondents expressed doubt about the ability of their external auditors to obtain the evidence that would be required to express an opinion on the proposed disclosures. Although many constituents cited increased audit work and Page 2 of 17

3 corresponding fees as a component of the increased cost of the proposed Update s proposals, none of the accounting firms that commented expressed doubt regarding their capability to audit the information. Volume of New Disclosures 6. Many respondents remarked that application of the new disclosure requirements will result in a significant increase in the volume of financial statement disclosures generally. Some of these respondents observed that the disclosure example in the proposed Update (paragraphs through 55-12) fills almost two entire pages. Because some constituents participate in numerous plans, and because those constituents have interpreted the example to be a representative disclosure for each individual plan, many respondents are concerned that the new disclosures will cause financial reports to drastically increase in size. In addition to cost concerns related to lengthier reports, some respondents have suggested that increased report sizes may result in confusion among financial statement users. The Multiemployer Subcommittee of the American Academy of Actuaries (CL #235) stated that We also are concerned that the sheer volume of disclosure information proposed will discourage all but the most diligent user from extracting the most important portions. As drafted, the footnote information for a single plan could require two pages of text. For a large company that participates in several dozen multiemployer plans, even with aggregation, the footnote information just for these plans could result in 50 or more pages of additional text. Timeliness of Information 7. Many respondents are concerned about the amount of time that will pass from the time plan financial statements are filed until the time a participating employer s financial statements are issued. Under Department of Labor rules related to reporting under ERISA, pension plans must file audited financial statements 9.5 months after year-end (that is, a calendar-year plan issues on October 15). If an employer issues financial statements 60 or 90 days after its own calendar year-end, much of the quantitative information required by the proposed Update will be 13.5 Page 3 of 17

4 months old. Some respondents noted that 13.5 months would be a best-case scenario, and that the disclosure would likely reach users much later. 8. Several constituents explained that this dated information could be misleading to financial statement users. Legacy Professionals, LLP (CL #80) stated that because...the employer would only have two year old information available for this aspect of its financial statement disclosure, [this] may confuse users and interfere with their ability to make decisions about the employer s net obligations. Cost Concerns 9. A majority of the respondents who oppose the proposed Update highlighted cost concerns as a primary reason for their oppositions. EMCOR Group, Inc. (CL #176) noted the types of costs that a participating employer might face to comply with the proposed disclosure requirements. They said, In our case, the implementation costs would be significant, and may involve adding staff just to comply with the Proposed ASU. These ongoing costs include the time and effort to: (a) compile the population of the local and/or national Multiemployer Plans, (b) attempt to determine whether the construction exception applies to the Multiemployer Plans, (c) ascertain all of the information needed for the proposed disclosure, (d) review and take ownership of all the information provided by the plans, which potentially could require a dialogue with the Multiemployer Plan(s), and (e) prepare the required disclosure and support. Additionally, in our case, there would be a significant increase in our audit costs and other professional fees, such as [for] attorneys and actuaries, around this proposed disclosure. 10. In addition to the costs that preparers will face to comply with the proposed guidance, many respondents indicated that multiemployer plans will face increased cost burdens to provide the required information. They mainly focused on the plan trustee s ability to provide an estimate of withdrawal liability on a regular basis. Groom Law Group (CL #279) indicated that...a very small portion of contributing employers (some have estimated as low as 2%) request the Page 4 of 17

5 calculation of their withdrawal liability for each year. The law provides that an employer is entitled to receive that information once annually but may be charged a fee by the plan for the calculation. The Carpenters Trust of Western Washington (CL #141) is a plan with approximately 800 contributing employers. As of October 27, 2010, the plan had received only 24 requests for an estimate of withdrawal liability. A significant increase in requests would result if all participating employers are required to disclose an estimate of withdrawal liability. 11. Whereas most respondents highlighted cost concerns, only 21 respondents provided estimates of the cost for preparers to obtain an estimate of withdrawal liability from their plans. Estimates ranged from $500 to $10,000 per plan per year, but most were within a tighter range of $1,200 to $1,500 per plan per year. Potential Harm in Bargaining Process 12. Many respondents stated that some of the proposed qualitative disclosures would require subjective judgments that may become a disadvantage to employers throughout the collective bargaining process. They noted that requiring disclosure of expected events will result in tipping their hand to union labor regarding their own expectations for the plan(s). Comments on Specific Disclosures 13. Paragraph B(i) in the proposed Update would require disclosure of Quantitative information about the employer s participation in the plan(s), for example, the number of its employee participants as a percentage of total plan participants disaggregated between active and retired participants, if obtainable, as of the most recent date available. 14. Many respondents are opposed to disclosing the number of employees to total plan participants because of the unique patterns found in union labor movement. Groom Law Group (CL #279) explained that In the industries covering the large majority of the multiemployer plan participants, plan participants sporadically work for many different contributing employers as they go from job-site to job-site. A particular employee may work for a hundred different employers over his career. Often, especially in times of high Page 5 of 17

6 unemployment, employee participants will travel or boom out following work around the country. In those cases, the contributions paid by their employer may be transferred ( reciprocated ) back to their home pension fund under a number of different methods. Thus, participants could theoretically work for every single employer that contributes to that plan and for many who do not technically contribute to the plan but whose contributions are transferred to the participant's home plan under a reciprocity system. Deloitte (CL #256) believes that paragraph B(i)...may not be operational. Given the mobile nature of the workforce that is typically covered by multiemployer plans, participating employers may find it difficult to implement this element of the proposal because it is not clear how an employer would determine which retiree participants to attribute to it. 15. Some respondents highlighted paragraph B(c)(3) as being inconsistent with the legal structure of multiemployer plans. This paragraph would require employers to disclose whether the employer is or is not represented on the board of trustees of the plan(s) or a similar body. Mooney, Green, Baker & Saindon, P.C., representing the Asbestos Workers local 24 Pension Fund (CL #192) explained that Under the terms of the Taft Hartley act under which multiemployer plans are organized, half of the trustees of a multiemployer plan are representatives of the employers U.S.C. 186(c)(5). Thus, under the statutory language, the answer to the question whether an individual employer has representation on a plan s board of trustees would always be yes. On the other hand, the Supreme Court has stated in no uncertain terms that trustees must act solely in the interest of the trust beneficiaries.... NLRB v. Amax Coal Co., 453 U.S. 322, 339 (1981). By that definition, the answer to the question must necessarily always be no, since an employer-appointed trustee would be barred from representing the interests of its appointing party. The Western Conference of Teamsters Pension Trust (CL #206) stated that The Draft, by requiring this information, is suggesting that a trustee may act in the interests of his or her employer and not as required by law. 16. Many constituents have concerns about the relevance of the proposed requirement in B(c)(2) to disclose how benefit levels are determined. They noted that users would not be interested to know that information and that to adequately Page 6 of 17

7 disclose it would require providing extensive detail about the collective bargaining agreement. The Western Conference of Teamsters Pension Trust (CL #206) stated that For all plans, benefit levels are determined by collective bargaining within the terms and conditions established by the plan trustees. If more than this simple statement must be disclosed, then it appears that the Draft would require substantial details about benefits, which are almost always very complex and not valuable to the users of financial statements. Estimate of Withdrawal Liability 17. The proposed Update includes a proposal to disclose an estimate of the amount of withdrawal liability that would be assessed if the participating employer were to withdraw from the plan. Disclosing an estimate of withdrawal liability was intended by the Board as a proxy for the employer s proportionate share of a plan s unfunded liability. However, most respondents to the proposed Update view this requirement as an expansion of loss contingency guidance. United Technologies Corporation (CL #99) reminded the Board that Under current accounting guidance, a provision would not be recognized under Topic 450 Contingencies, unless it is either probable or reasonably possible that the company would exit the plan.... Presenting potential obligations for circumstances and events that are either improbable or remote is misleading and only succeeds in presenting a worst-case-scenario and potentially alarming users of the financial statements. 18. Only five respondents support the use of an estimate of withdrawal liability as a proxy for an employer s proportionate share of unfunded liability. Standard & Poor s (CL #213) explained that it views...the liability associated with a company s aggregate multiemployer plan deficit as debtlike. They explained that they recognize that withdrawal liabilities can be calculated using a number of different methods and are highly dependent on various factors.... However, from an analytical perspective, withdrawal liability estimates provide us with a proxy for a company s estimated pro-rata share of the total underfunded plan amount. Yet, we believe this would be superior to no information and not Page 7 of 17

8 inconsistent with many other estimates being used to derive information in financial reports. The Investors Technical Advisory Committee (ITAC; CL #322)... believes that investors similarly consider single-employer corporate pension plan exposures and multiemployer plan exposures and, therefore, they want equivalent disclosure irrespective of the legal form of the pension obligation. 19. Some preparers and plans asserted that users of financial statements would be confused by a withdrawal liability disclosure, and that users might question an entity s ability to continue as a going concern after reading the disclosure. Withdrawal Liability Exceptions 20. Several exceptions and exemptions exist under multiemployer pension law. Most of the exceptions relate to the assessment and payment of withdrawal liabilities. Many are industry-specific, but some are not. 21. Some general peculiarities of multiemployer law for withdrawal liabilities include: A de minimis rule that stipulates the minimum amount (usually $50,000 or $100,000) for which a withdrawal liability can be assessed. If a withdrawal liability is calculated to be below the adopted de minimis amount, then no withdrawal liability is assessed. A 20-year limit for payment of the withdrawal liability. If the negotiated/calculated annual payments toward the withdrawal liability will not completely repay the amount within 20 years, the excess amount is not assessed. As explained later in this summary, withdrawal liability payments are calculated based on historical contributions and participation. A free-look provision is granted to plans that meet certain requirements. This provision allows employers to enter and remain in a plan for up to five years with no potential for a withdrawal liability. Page 8 of 17

9 Industry-specific guidance that provides for additional ways to avoid withdrawal liability assessment. Construction Industry 22. Over 230 of the respondents commented about the effects of the proposed disclosures on the construction industry. Preparers, industry organizations and unions, and pension funds representing the construction industry responded to the questions in the proposed Update. Five of construction company sureties also responded to the proposed Update. All construction-related respondents oppose the proposed Update s proposal to disclose an estimate of withdrawal liability based primarily on the unique legal features of construction-related multiemployer plans. 23. Because of the nature of the construction industry s employment patterns, multiemployer pension law has created special rules for the assessment and payment of withdrawal liabilities. Because contractors and other employers in the construction industry typically need different combinations of specific types of labor, those employers typically enter and exit collective bargaining agreements, and therefore multiemployer plans, on a frequent basis. For example, a general contractor may hire a combination of skilled plumbers, electricians, and carpenters to work on a project for one month. After the project is completed, the contractor has no further need for or means with which to pay those employees. The contractor may not need any skilled plumbing labor for two years. Multiemployer pension law has developed withdrawal liability exceptions for such situations to avoid frequent assessments and payments of withdrawal liabilities, which would deter contractors from using union labor. 24. The most significant difference in multiemployer pension law is a five-year proviso that allows construction employers to exit a plan without incurring a withdrawal liability. If an employer exits a multiemployer plan, but does not hire non-union labor during the following five years after withdrawal, no withdrawal liability is assessed. Page 9 of 17

10 Entertainment Industry 25. The entertainment industry is subject to the same swings in employment needs as the construction industry and multiemployer pension law has, therefore, developed similar exceptions and exemptions. The entertainment industry also allows employers to avoid withdrawal liability assessment if the employer does not hire non-union employees during the five years following withdrawal from a plan. 26. Because of the differences in the law for these industries, and to the resulting differences in withdrawal liability calculations, respondents from these industries oppose disclosing an estimate of withdrawal liability. Many of the respondents from the construction and entertainment industries requested an exemption from the proposed disclosures for those industries. Subsidiaries Following Multiemployer Plan Disclosure Guidance 27. Some respondents commented on the applicability of the proposed Update s guidance to subsidiaries following defined benefit pension guidance in paragraphs and Those paragraphs of implementation guidance explain that a subsidiary whose employees participate in a parent company s single-employer defined benefit pension plan should follow multiemployer guidance as contained in paragraph The proposed Update would modify this reference, but would not change the guidance for subsidiaries participating in a parent s defined benefit pension plan. 28. Respondents to this topic stated that the proposed Update was not intended to apply to such subsidiaries parent-company financial statements. KPMG (CL #225) stated that it is unclear whether the proposed disclosures would apply only to employers participating in multiemployer plans or whether they would apply to employers that are using multiemployer plan accounting. Exelon Corporation (CL #261) does not participate in any multiemployer plans of legal construct, but its single-employer plans cover substantially all employees of Exelon and its subsidiaries. They do not believe the expanded disclosures are necessary for an understanding of the risks and Page 10 of 17

11 requirements of participating in a single-employer plan, and in some cases do not reflect the substance of the parent-subsidiary arrangement. Alternative Proxies for Unfunded Liability 29. Some respondents who disagree with disclosing an estimate of withdrawal liability acknowledged the goal of providing users with an understanding of the employer s share of the unfunded liability. Many of those respondents suggested alternatives to estimated withdrawal liability, recommending the following alternatives as acceptable approaches to accomplish this objective: The maximum annual payment amount under a withdrawal scenario Terms of adopted funding improvement and/or rehabilitation plans Funded position of plan(s) and the employer s proportionate participation in the plan(s) Reference to publicly available names and financial information of plan(s) in which the employer participates, which would allow users to calculate their own estimate of proportionate share of liability. Maximum Annual Payment under the Withdrawal Scenario 30. While an estimate of total withdrawal liability was widely rejected, some respondents proposed requiring a disclosure of the maximum annual amount that an employer would pay upon withdrawing from a plan. These respondents explained that when an employer withdraws from a plan, one option for paying the withdrawal liability is to remit equal, annual payments to the plan. These annual payments are not based on the total withdrawal liability amount, but are derived from the employer s historical contributions and relative participation in a plan. The National Coordinating Committee for Multiemployer Plans (NCCMP; CLs #8 and 8A) is opposed to requiring disclosure of an estimate of withdrawal liability. However, the NCCMP suggested that the Board, if determined to use some variation of withdrawal liability, require disclosure of the annual payment amount that would be required in the event of a withdrawal. This amount is more relevant to investors, as it Page 11 of 17

12 represents the actual amounts of payments that the company would make to the plan in the event of a withdrawal... [and] the annual payment amount is concrete, as companies very often pay off their assessments in this exact way. Companies can easily perform this calculation on their own with minimal effort. 31. This alternative is supported by several large industry and professional organizations in addition to the NCCMP, including the International Foundation of Employee Benefit Plans and the American Academy of Actuaries. 32. Some constituents mentioned that the maximum annual payment upon withdrawal is not an appropriate proxy for an employer s proportionate share of the unfunded liability, based on their view that estimated withdrawal liability (or any amount related to it) should only be disclosed when withdrawal from a plan is being contemplated. Others noted that this amount is based on historical contributions and, therefore, does not reflect future cash flows. Terms of Adopted Funding Improvement/Rehabilitation Plans 33. Some constituents suggested that expanded disclosures related to an employer s share of underfunding should only apply if the plan in which the employer participates is significantly underfunded. Those constituents propose that the Board make use of Pension Protection Act (PPA) guidance to determine which plans should provide additional disclosure. 34. The PPA requires a multiemployer plan in endangered, seriously endangered, or critical status to adopt a funding improvement or funding rehabilitation plan and disclose the terms of the plan(s) in its statutory reports. The PPA defines a plan as endangered if it is less than 80 percent funded or has an accumulated funding deficiency for the current year or projected accumulated funding deficiency for any of the next six years. A plan is considered seriously endangered if it meets both criteria. A plan is in critical status if, among other things, the plan is less than 65 percent funded. 35. Supporters of this alternative recommend requiring employers to disclose the terms and conditions of adopted funding improvement or rehabilitation plans. These Page 12 of 17

13 constituents noted that preparers will be able to disclose this information at little or no additional cost because plans are required to provide it to sponsors whenever applicable. This is different from the PPA requirements for estimates of withdrawal liability, which are required to be reported to an employer only when the employer requests the information. The Alliance of Motion Picture & Television Producers and the Broadway League (CL #180) supports this alternative because Funding Improvement and Rehabilitation Plans are easily obtained, thereby avoiding all of the serious drawbacks, expense and delays of attempting to obtain withdrawal liability information. The alliance noted that disclosing adopted plan information would be a much more meaningful source of real world information about a plan's financial health, how the plan will be trending over time, and how that trend will impact the contributing employers. 36. However, many respondents are opposed to paragraph B(c)(5), which would require disclosure of remedies being considered. These respondents stated that disclosing remedies that have not yet been implemented is conjecture and will cause harm to one or both of the parties in the collective bargaining process. Funded Position of Each Plan and Employer s Proportionate Participation 37. Some respondents support requiring employers to provide information about the funded status of each plan in which the employer participates, along with its relative participation in that plan. They noted that this would provide enough information for users to understand the employer s exposure to risks from a plan s unfunded liability. Ernst & Young (CL #133) explained that...an employer could meet the disclosure objective by disclosing the number of its employees participating in a plan in relation to the total number of plan participants, or by disclosing its contributions as compared to total plan contributions. In other cases, an employer s share of the funded status may be obtainable directly from the plan. ITAC (CL #322), which supports either withdrawal liability or this approach, stated that the most important information an investor needs to understand a multiemployer liability are: a) historical trend of and future Page 13 of 17

14 expected contributions, b) a company s aggregate percentage of the underfunded amount of its multiemployer plans, and c) the risks and uncertainties arising from its participation in the plans. 38. The staff notes that at least one large credit rating agency utilizes a similar approach in assessing an employer s exposure to risks from participating in a multiemployer plan. Reference Names of Plans for Users to Access and Analyze 39. Some respondents believe that enough information is currently available to the public for users to determine an employer s proportionate share of underfunding without requiring any more disclosure than the name(s) of the plan(s) in which the employer participates. Legacy Professionals (CL #80) recommended that instead of including untimely information about the assets and obligations of the plan, the users be informed that the plan s most recent Form 5500 with audited financial statements attached, can be found at the DOL s website, Effect on Nonpublic Entities 40. Respondents to the proposed Update generally drew no distinctions between the effect the proposed disclosures would have on public and nonpublic entities. Most respondents to the proposed Update are either nonpublic entities or represent nonpublic clients. Additionally, the construction and entertainment industries, which are subject to specialized pension rules and which are heavily represented in the comment letters, consist largely of nonpublic entities. The Private Company Financial Reporting Committee s letter (CL #321) echoes the benefits and challenges outlined above. They stated that generally, PCFRC members find the proposed disclosures to be useful information to a private company financial statement user s decision making and ability to forecast cash flows. Existing pension disclosures could be improved, as their usefulness in helping cash flow prediction is limited. The Committee is concerned about the additional costs that would be imposed on private company financial statement preparers and practitioners in reporting the proposed disclosures. Also of concern to Page 14 of 17

15 several user members of the PCFRC is that the information necessary to prepare the proposed disclosures will not be obtainable on a timely basis, due to the regulatory and compliance deadlines that drive pension plan reporting. 41. Respondents who prefer differing disclosures for nonpublic entities noted that private companies have fewer resources available to obtain, organize, and report the disclosures that would be required by the proposed Update. KCI Construction Company (CL #175) suggested that...non public entities be excluded from the amendment in its entirety, as typically they are smaller companies with limited resources and thus would be impacted to a much greater extent than public entities. 42. Other respondents noted that users of nonpublic entity financial statements have more direct access to management and, therefore, do not require additional disclosure. Some of these respondents have highlighted the work of the Blue Ribbon Panel as support for this argument. The Construction Financial Management Association (CL #223) stated that although it can understand the need for more disclosure by public companies,...for nearly all private companies, its stakeholders have the ability through one-on-one dialogue to obtain any information needed in order to make informed decisions regarding the business. Many users of nonpublic financial statements will not need or use the proposed added quantitative information, and requiring this information for all nonpublic entities is more burdensome than the benefits obtained. 43. Respondents who disagree with differing disclosures for nonpublic entities acknowledged that the same resource-related challenges exist for both types of entities and that delaying effective dates is a disservice to users of financial statements. PPL Corporation (CL #204) believes that...the effective date should be consistent for all entities. There are many large, nonpublic companies with the same resources as public entities. Consistency in disclosure across all reporting entities should be accomplished when possible and the playing field should not be tilted against large public companies. Page 15 of 17

16 Disclosures That Received Favorable Responses 44. Many of the respondents who oppose the proposed Update highlighted the disclosures that they would view as both appropriate to report and beneficial to users. Although there were some differing opinions, respondents generally supported the following disclosures as contained in the proposed Update: B(a) The number of plans in which the employer participates B(b) For individually material plans, the name of the plan(s) B(f) Employer s contributions as a percentage of total contribution to the plan(s), if obtainable, for the year ended as of the employer s latest statement of financial position date or most recent date available before the statement of financial position date and, for comparability, that percentage for the corresponding prior periods B(g) A description of the contractual arrangement(s), including all of the following: 1. The term of the current arrangement(s) 2. For each future year covered by a contract, the agreed-upon basis for determining contribution(s) 3. Any minimum contribution(s) required by the agreement(s) B(h) Percentage of the employer s employees covered by such plan(s) B(j) Amount of contributions for the current reporting period B(k) Expected contributions for the next annual period. 45. In addition to general concerns about the remaining disclosures, some constituents raised concerns about specific disclosures. Those specific disclosures and any alternative suggested are discussed below. Page 16 of 17

17 Effective Date 46. The proposed Update was initially proposed to be effective for financial statements issued ending on or after December 15, 2010, for public entities and on or after December 15, 2011, for nonpublic entities. Many respondents stated that the guidance in the proposed Update cannot be implemented in that time frame. They oppose that effective date because (a) the time between the end of the comment period (November 1, 2010) and the effective date is inadequate in which to prepare to comply with the new requirements and (b) the large amount of time necessary to obtain the required information from the plans in which employers participate. 47. The staff notes that at the November 10, 2010 meeting, the Board decided that a final Update will not be effective for the 2010 calendar year-end reporting period. It will decide on an effective date at a future meeting after it has substantially concluded its redeliberations. Page 17 of 17