The Hidden Pension Threat

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But even with its star lineup, Central States is in dire straits, with $21 billion in assets and $39 billion in liabilities.

Sure, the market rout has pounded Central States' investment portfolio this year. But the pension is also reeling from its decision last year to let its biggest employer, UPS, exit the plan in exchange for a $6 billion one-time withdrawal payment. UPS, which declined to comment for this article, worried it would have to shoulder more of the pension burden, especially if other contributors went out of business. The Teamsters figured the rush of cash would improve the fund's financial position.

RETHINKING RETIREMENT

The idea turned out to be shortsighted. UPS's exodus has deprived the plan of a critical source of cash just when it needs it the most. Now employer contributions account for just 30% of Central States' income, compared with 50% when UPS was still adding money, according to Teamsters for a Democratic Union, a grassroots lobbying group. The rest is supposed to come from investment returns—but the fund is down 22% this year. "We reviewed this at the time and felt it was in the best interest of the UPS employees, the union, and the remaining participants in Central States Pension Fund," says Ken Hall, a pension trustee and Teamsters vice-president.

The UPS situation isn't Central States' only problem. One of its biggest remaining contributors, YRC Worldwide (YRCW), on Dec. 3 won tentative wage concessions from the Teamsters in a bid to cut its costs. Even so, the company's financial outlook is worrisome for Central States and its members. Says YRC's Zollars: "We are feeling good about our longer-term prospects."

Now workers in the Central States plan are rethinking their retirement strategies. Tim Pagel planned to stop driving a rig in 2011, soon after his 57th birthday. Having worked for YRC for more than three decades, Pagel is eligible to retire before age 65 with sizable pension benefits—for now, at least. The Houston resident isn't sure he can count on the same package in 2011. "I've wanted to get out [of truck driving] for quite a while because it's so physically demanding," says Pagel. "I've given 34 years to this industry and worked hard. I'm a little bit angry at what's happened."

Even retirees, whose pension benefits are guaranteed, could be at risk. If the funding woes at Central States continue, the plan could, in the worst-case scenario, end up in the hands of the PBGC. But the PBGC limits benefits in multi-employer plans to about $13,000 a year per retiree, compared with roughly $52,000 for single-employer plans. That would be a big cut for Frank Bryant, a 67-year-old former UPS driver who retired in 2003 and now collects a $37,000 annual pension from Central States. "It looks like a downward spiral right now," says the Greensboro (N.C.) resident. Central States says it has no plans to alter benefits or employer contributions.

It's not all bad news in multi-employer land. Consider the Western Conference of Teamsters Pension Fund, which has $30 billion in assets, covers more than 550,000 union members and retirees, and still has roughly 97 cents for every $1 of benefits even amid the bear market. What's its secret? Besides cutting benefits years ago in anticipation of a downturn, the fund's trustees have a more conservative investment philosophy than peers. Western Conference has 45% of its assets in stocks and 41% in bonds, vs. 61% and 28%, respectively, for the typical corporate pension plan. "They have done a lot of things right," says James Dexter, a consultant with benefits firm Mercer.

Other plans would do well to follow Western Conference's lead. But overhauling a plan's portfolio would be tricky now. Fund managers who are sitting on losses are loath to sell huge swaths of beaten-down stocks. No one wants to sell at the bottom.

Unless the government offers some relief, many pension plans will soon run out of options. Cutting future benefits and raising company contributions can add only so much to the coffers, especially if investment performance continues to deteriorate. "There is no brilliant answer," says Don Crosatto, an official with the International Association of Machinists in California and a trustee of the Automotive Industries Pension Fund, which has already cut early retirement benefits. "We are going to make it or break it on the strength of our investments." Employees, managers, shareholders, and taxpayers have much riding on the outcome.

Goldstein is a senior writer at BusinessWeek.