Pension Pains

July 13, 2005
A brief look at the losses suffered by employees in the air carrier business and others as a result of bankruptcies and the termination of their pensions.

We have all been reading about the losses suffered by employees in the air carrier business and others as a result of bankruptcies and the termination of their pensions. Here is a brief discussion of what's been going on.

Defined Benefit Plan

In the old days when you went to work for a large air carrier or any other company for that matter, they usually had available what is now called a defined benefit plan. That is, if you worked long enough, and participated in the plan, you received a specific amount of money every month after you retired. All you had to do was hang in and stay alive until a certain age and you got paid a reasonable amount, that, when added to your Social Security, provided a modest income during your sunshine years. This was a benefit provided by many companies to encourage loyalty and longevity with the company. My father had such a plan when he worked for the Edison company as a mechanic. However, there is no law that says a company must provide a retirement plan. Many today don't have any type of retirement plan.

Most of the so-called legacy airlines provided this type of retirement program in the past and some still have similar plans in effect, but they won't last long. If you are in one you had better be prepared for the worst.


Well, along came ERISA (Employees Retirement Income Security Act) in the late 1970s which was your government's grand plan to improve and provide more benefits protection to the employee. You can imagine what happened.

Most private companies by this time saw the writing on the wall and were looking for a way out of the traditional pension plan. Most of these plans were grossly underfunded (something like Social Security today) and there was no way they could continue going into the hole to provide this type of plan. But take note . . . governmental entities, state and local, kept right on with their programs for one good reason. Nobody (the taxpayers) cared or for that matter paid attention. Keep in mind that the fire departments, police departments, and just about every other government employer still have a defined benefit plan including of course our Congress and other federal and state employees.Why? Because, they were all conveniently exempted from ERISA regulation. Their pensions are guaranteed by you, the taxpayer. They simply vote the continuance and enhancement of their plan themselves. Talk about conflicts of interest.

Self-Directed Plans

The alternative to the defined benefit plan, is the self-directed pension plan. This is loosely defined as a program where you put in some money and the company puts in a little money and you invest in various ways for your future retirement security (401K, etc). This type of plan is much less attractive for the employee and can be risky, but it is the most popular plan generally available today. There are few if any remaining industry-offered defined benefit plans because of their high costs. Many companies simply cancel them and provide alternate plans that are less costly. So you younger guys should consider city, state, or government employment if you want an attractive pension alternative.

Pension Benefit Guarantee Corp. (PBGC)

ERISA provided for the creation of the Pension Benefit Guarantee Corporation. This is a government organization that takes over a pension program when a company goes bankrupt or just cannot fund the pension program anymore. It's like the FDIC, Federal Deposit Insurance Corporation, that insures your bank deposits. The PBGC provides a form of insurance to industry employees so that they can recover some percentage of their defined benefit plan when it or your company fails. However, this amount is generally quite a bit less than they would have received under their plan. The PBGC is supposed to be funded by all companies by way of joint premium payments into the program. But the PBGC is also presently underfunded and you know who is going to eventually pay for this.

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.

We recall that it was just a few years ago that United attempted to merge with America West which had already been in and out of bankrupcy in the middle 1990s. After 9-11 it was perilously close to filing bankrupcy again when it was saved by a $380 million loan from the government. The merger deal did not fly when America West backed away from some difficult conditions set by United. Now it's US Air, also in bankrupcy itself, that is merging with America West. You can bet a lot of mechanics and others will be let go in this deal. Just watch. Many observers state that these two weak companies cannot support themselves now. How can they expect the merged companies to survive as they now stand?

City Woes - Criminal Complaints

Airlines are not the only ones with pension problems. Most major cites in the country also have underfunded retirement programs. You may have read about the huge $1.4 billion deficit in the City of San Diego's pension plan. Remember, they are not covered under ERISA and the PBGC for any defaults. They only have the taxpayers to fall back on. Rest assured, they will survive.

The San Diego newspapers say that the pension board that sets the amounts, raises, and other details of the program have been charged in criminal complaints for raising their own and predecessors' pensions and adding other expensive self-serving perks to the plan. This is a violation of state law against self-dealing and the city attorney has stated that he would not allow pension benefits that were void at their creation, to be paid by the city. The trial of these people, if it occurs, will certainly open up a Pandora's box of problems for a new mayor. The present mayor and city manager have resigned, of course, with their pensions intact.

One can only wonder if criminal complaints might be available to some imaginative prosecutor to help put a stop to the wholesale abandonment and abuse of pension plans in industry?

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About the Author

Stephen P. Prentice

Stephen P. Prentice is an attorney with an Airframe and Powerplant certificate, is an ATP rated pilot, and is a USAF veteran. E-mail: [email protected].