CINCINNATI — Kroger Co. here said last week that it would merge four pension funds to which it contributes into a single fund, a unique move analysts described as “forward thinking” for its potential to stabilize the company’s pension obligations and secure retirement benefits for thousands of workers.
Kroger officials described the move as a one-time opportunity to take advantage of low interest rates to fund multi-employer plans where Kroger workers represented the vast majority of plan participants. The four funds cover 65,000 workers represented by 14 locals of the United Food and Commercial Workers — or about 20% of Kroger’s workers and 30% of its pension funds. As of late last week, 11 of the 14 locals had approved the plan, and Kroger expected the remaining locals to grant approval this week.
As part of the deal, Kroger will directly manage the funds, which were previously managed jointly between participants and unions. The company has agreed to make up the underfunded portion of the funds by 2018. The agreement also establishes a pension benefit formula through 2021, which concludes collective bargaining with the affected unions on this subject for the next 10 years.
“To be able to fund this today and agree on the benefit for 10 years is something that we’re happy with and the union is happy with,” Mike Schlotman, Kroger’s chief financial officer, said during a conference call discussing the plan last week. “We feel it provides the right replacement income for our active associates for their future benefit accruals. And they don’t face the possibility of some draconian cuts in their future benefit accruals, if these plans continue to wander further into critical status.”
Under regulations of the Pension Protection Act of 2006, pension trustees are required to take action when certain “yellow” or “red” thresholds are reached. Kroger did not specify the severity of the plans’ shortfalls but acknowledged that funding them would be increasingly expensive going forward. “We believe that given the funding status of these plans that our expectation is each one of those negotiations going forward would have had serious conversations about the level of benefits that can be provided and probably all of them would have included incremental cents-per-hour contributions to make up some of the shortfall,” Schlotman said.
Although the market was largely indifferent to the news, analysts on the conference call last week received the news warmly, congratulating the company for “forward thinking.”
“What this does is eliminate the risk that any of these plans ‘go red,’ and it puts them in a very strongly funded position,” one analyst, who asked not to be identified, told SN. “The company is making a very strong commitment up front, and the workers won’t have to worry about the pension benefits constantly being negotiated and cut. So it’s a win-win. It takes the risk away from Kroger, it takes the risk away from the union, and it saves money.”
Kroger expects to contribute approximately $650 million to the new fund in January. As a result, the company would incur a charge to earnings for the fourth quarter of 2011 of approximately 73 cents per share.
However, it expects the deal will contribute between 4 cents and 6 cents per share to earnings beginning in 2012 — or around $45 million.
Schlotman said the deal was around 18 months in the making and possible mainly because of the high percentage of Kroger workers represented in the plans. Such a deal is unlikely with Kroger’s other muli-employer pension funds, he said.