Pension Pains

The downside for the employee is that the Pension Benefit Guarantee Corporation gives a defaulting or bankrupt company a way to legally get rid of the pension plan.

These defaults first started some years ago with the so-called "rust belt" steel companies (Bethlehem Steel was the largest default) and later included various airlines like Eastern, TWA, America West, ATA, US Air, and now United. By way of contrast, the recent Enron failure, you may recall, did not involve a defined plan. The poor employees there had most of their money in 401K company stock which went in the tank and many lost everything. This was a self-directed plan.

Again, there is no requirement that companies provide a retirement plan or any other benefits at all. Of course all the governmental people have their defined benefit plans because it's a good deal and that's what government is all about when the taxpayers pay. Everybody else can have something similar but it's the more risky self-directed plan. This is what most people in industry have today. You younger guys take note.

United Airlines

You might have read recently that the judge in this bankruptcy case allowed United to terminate its defined benefit retirement plans and turn them over to the Pension Benefit Guarantee people to pay and administer. Not having to pay this enormous amount of money means that the airline can become much more competitive in the marketplace. The threat is that it could be an incentive for others to follow. United has four plans for the various people concerned and it is estimated that it will save some $7 million in immediate costs for investment elsewhere in the company. The total savings, including the unfunded liability estimates, are some $4 billion. You can be certain that the other carriers, Delta, Northwest, and perhaps American, will all join the club and file for Chapter 11 relief if they don't get some pension reform outside of the bankrupcy process.

United's action will be painful to 120,000 employees, including retirees. US Air people and others have already felt this sting. We should keep in mind also that United employees, like Enron employees were part owners of the company and stand to loose on their stock investment as well.

Needless to say, all the top dogs of the company no doubt have their pension plan protected by pre-funded plans. This is a plan that is untouchable in bankruptcy because it is funded in advance and put in a trust. These arrangements recently came to light at American and forced the retirement of its CEO. Nobody knows how far down the management chain this may reach. It is a commonly used plan to protect top management from any loss when the company goes bankrupt.

United's action in terminating its pension plan has undoubtedly impacted the work ethic of the employees. They have already been subjected to a double whammy, namely, sharp cuts in benefits and salary and then this comes along. It could be the last straw.

Filing for Chapter 11 bankrupcy also allows a company to terminate its employment contracts with the unions representing employees, reduce wages, and modify working conditions as it sees fit. On May 31, shortly before a bankruptcy judge was to rule on whether the existing contract could be replaced with one giving workers reduced wages and benefits, mechanics and other ground support employees represented by the International Association of Machinists (IAM) and Aircraft Mechanics Fraternal Association (AMFA) reached an agreement with the company on a five-year contract that averted a potentially crippling strike.

The protection afforded by our bankruptcy law allows these carriers to stay in business indefinitely in spite of large losses and permits cancellation and restructuring of their costly labor and lease or finance agreements. They can further reduce costs by not paying or paying less on their aircraft leases. Maybe some changes should be made in the bankruptcy laws. Consumers were recently severely impacted by changes made in the case of individual bankruptcies.