Kroger sees hit, then gain, as pension plans merge

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(Global Markets) - Kroger Co (KR.N) said on Thursday that four of the pension funds to which it contributes will merge into a new fund, a move that should ultimately trim its pension contribution costs after it takes a charge this year.

Kroger said it would borrow money at low interest rates to make a significant up-front pension contribution that will reduce future pension contribution related expenses. The fund merger also will lower administrative costs and investment fees.

Kroger said employees and retirees will gain because the pension plan will be more fully funded, which significantly reduces risk of decreased benefit payments. Kroger and the union also agreed to a set of calculations for retirement payments, which will be in effect for a decade.

The four United Food and Commercial Workers/multi-employer pension funds will merge into a new fund as of January 1, 2012, the company said.

Kroger, the largest traditional U.S. grocer, employs more than 338,000 workers. The company said the merged fund will secure pension benefits for more than 65,000 workers from 14 UFCW union locals. Eleven of those union locals have approved the deal. Kroger expects the remaining three locals to grant their approval by December 21.

The company plans to contribute about $650 million to the new fund in January. It now expects to incur a charge of about 73 cents per share in the fourth quarter of 2011 because of that contribution, though the exact effect on profit will depend on how much it actually contributes.

The new arrangement should lead to a lower 2012 pension expense and increase fiscal 2012 profit by 4 cents to 6 cents per share, Kroger said.

"This will establish funding certainty that benefits both participants and the company," Mike Schlotman, Kroger's chief financial officer, said on a conference call with analysts.

As of January 1, assets in the new fund will total about $2.5 billion. Kroger will be responsible for the investment and custody of all assets of the new plan. The assets previously were managed by the union and Kroger trustees.

The four funds involved in the merger represent roughly 30 percent of the current underfunding of all the multi-employer plans to which Kroger contributes.

Kroger has agreed to fund the unfunded obligation by March 2018. Underfunded pension plans don't have enough money readily available to cover current and future retirement obligations.

"Given the low interest rate environment, we believe it is prudent to fund a significant portion of this obligation now," Schlotman said.

"In a volatile financial environment, this plan represents a long term solution for a secure retirement," said UFCW International President Joseph Hansen. The union said the deal covers 170,000 retired and active Kroger workers in 15 states, primarily in the Midwest and South.

Defined pension benefit plans provide a pre-set monthly benefit, paid by the employer, upon retirement.

Many U.S. companies have replaced those plans with defined contribution plans such as 401(k)s, where employees contribute a portion of their salaries to investment accounts that do not promise a specific benefit.

Kroger and direct rivals like Safeway Inc (SWY.N) and Supervalu Inc (SVU.N) are squeezing costs as they compete with non-union discounter Wal-Mart Stores Inc (WMT.N), which sells more groceries than any other U.S. retailer.

Shares in Kroger were up 1.1 percent at $23.80 in midday trading on the New York Stock Exchange.

(Reporting by Jessica Wohl in Chicago and Lisa Baertlein in Los Angeles, editing by Gerald E. McCormick and Gunna Dickson)