United Airlines Defaulting on Pensions
United Airlines, which is operating in bankruptcy protection, received court permission yesterday to terminate its four employee pension plans, setting off the largest pension default in the three decades that the government has guaranteed pensions. The ruling by Judge Eugene R. Wedoff of Federal Bankruptcy Court came after a lengthy hearing in a crowded Chicago courtroom, near where United is based. Despite pleas by union lawyers, Judge Wedoff sided with United, which had insisted that it could not emerge from bankruptcy protection with its pension plans in place.
The ruling releases United, a unit of the UAL Corporation, from $3.2 billion in pension obligations over the next five years. The federal agency that guarantees pensions, the Pension Benefit Guaranty Corporation, will assume responsibility for the plans, which cover about 134,000 people. Some retirees could see sharply lower pension payments as a result; others will see little change in benefits, depending on a variety of factors. Some retirees at US Airways, which has terminated its plans, have seen benefits drop by as much as 50 percent. The airline, which has been in bankruptcy protection since December 2002, has been pushing to end its pensions since losing its bid for a federal loan package last year. But unions representing United’s employees fought the action, threatening to strike if the pensions were set aside.
Along with raising that prospect, the action has significant implications for the airline industry, which has lost more than $30 billion since 2000, and perhaps for other industries like automobiles, with similarly heavy legacy costs. Analysts have predicted that if United won its case, there could be a domino effect as other airlines are forced to seek bankruptcy protection to bring their pension costs down to United’s levels. That move would probably swamp the pension agency, which was created in 1974.
Lovely. While I understand the rationale behind the federal guarantee of pensions, it makes little sense to allow businesses to simply waive the contractual obligations it has made with its employees.
Update: Bryan notes in the comments that the PBGC is not technically funded by the taxpayers, although that’s the backup position. True:
PBGC is not funded by general tax revenues. PBGC collects insurance premiums from employers that sponsor insured pension plans, earns money from investments and receives funds from pension plans it takes over. PBGC pays monthly retirement benefits, up to a guaranteed maximum, to about 518,000 retirees in 3,479 pension plans that ended. Including those who have not yet retired and participants in multiemployer plans receiving financial assistance, PBGC is responsible for the current and future pensions of about 1,061,000 people.
The maximum pension benefit guaranteed by PBGC is set by law and adjusted yearly. For plans ended in 2005, workers who retire at age 65 can receive up to $3,801.14 a month (or $45,613.68 a year). The guarantee is lower for those who retire early or when there is a benefit for a survivor. The guarantee is increased for those who retire after age 65.
So, clearly, the United employees had a rather sweet pension plan if they were retiring with pensions in the $90,000 plus range.
Bryan has more at AWS.