Saturday, April 23, 2005

PBGC Takes Over United Pension Plans

United Airlines and the PBGC announced a settlement that would allow the airline to hand over its four underfunded pension plans to the government in the largest corporate-pension default in US history. While the move needs approval by a bankruptcy-court judge and is being contested by some of the airline's unions(*), the shedding of $9.8 billion of retirement obligations would represent a huge step in UAL's efforts to lower its costs and attract funding to exit from Chapter 11 this fall. Giving up the plans would save the company $645 million a year for the next five years.

Good for United, bad for the PBGC and John Q. Taxpayer, since the PBGC is already running a $23.3 billion unfunded liability.

(*) The Association of Flight Attendants has already announced its intention to fight this in court. AFA has also voted to let the union call a strike if its contract is abrogated by the bankruptcy judge, a step that has no legal precedent and one that United says would be illegal.

The surprise UAL settlement, reached Friday during a regularly scheduled hearing in bankruptcy court in Chicago, would cancel objections raised by the PBGC to UAL's intentions to jettison its retirement plans. Terms of the agreement are expected to be filed with the court tomorrow, and Judge Eugene Wedoff scheduled a May 4 hearing on the matter. UAL said the agreement would keep it on track to step out of court protection as "a sustainable, competitive enterprise for the long term" and would narrow the number of issues to come to the bankruptcy court at a trial on May 11. Erasing that liability could force other unprofitable airlines with heavy pension obligations to seek bankruptcy protection specifically to turn over their own underfunded plans onto the government. If UAL succeeds in eliminating its pension liabilities that would substantially worsen the situation for competitors that don't have this relief. Then the rest of the big airlines that offer such costly defined-benefit retirement plans will probably follow suit since they couldn't possibly survive with these costs intact.

This could very well create a domino effect that destroys the PBGC.

The PBGC last month asked a federal judge to let it unilaterally take over a pension plan covering 36,000 active and retired mechanics and ramp workers, and in December made the same move toward the plan covering 13,500 active and retired United pilots. The agency wanted to assume those funds before further benefits accrued, to its financial detriment. The PBGC was hoping at least one or two of the other United plans could be retained. But the agency was hit by an adverse legal ruling last month in federal court in Delaware in a pension-termination case involving Kaiser Aluminum Corp. The court rejected the agency's position that each pension plan sponsored by a company should be looked at individually. On Friday, the PBGC said the settlement agreement provides a better recovery than it would have received as an unsecured creditor in UAL's bankruptcy case. The PBGC said it will guarantee payments to plan participants totaling $6.6 billion, meaning the workers and retirees would be shorted by $3.2 billion in the form of benefit reductions(*).

(*) What the article doesn't explain is that these shortages affect mostly the recipients of the largest benefits. Rank-and-file participant benefits are seldom affected in a PBGC takeover.

Source: Wall Street Journal

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