CHICAGO American Airlines wants to terminate the pensions of 130,000 workers as part of its bankruptcy proceeding. The move would be good for the company's balance sheet, but would it be good for America?
American's pension termination would be the largest in U.S. history. The airline wants to end the plans and turn them over to the Pension Benefit Guarantee Corp (PBGC), a government-sponsored agency that insures most private-sector defined-benefit pensions through premiums paid by plan sponsors.
The airline would instead offer workers a 401(k) plan with a company match. That would have value to workers, but nothing close to the retirement security provided by a pension's guaranteed lifetime payments.
Josh Gotbaum, the PBGC's director, has mounted an unusual public campaign against American, arguing that the airline hasn't made the case that it needs to terminate the plans. That question will be decided in bankruptcy court, but American's story puts a spotlight on broader questions about the future of traditional pensions.
These include whether corporations should be able to use bankruptcy court to shed pensions; how to balance the stresses businesses face in tough times against their retirement promises to workers; and the future health of the PBGC itself, which faces a record $26 billion long-range deficit accrued from pension failures over the extended recession.
The American Airline pensions are just 64 percent funded. The PBGC has estimated that taking on the plans would create a $10.2 billion liability for the agency -- and it argues that the plan's funding is so low mainly because of a series of exemptions on federal funding requirements granted by Congress to American and other airlines.
The Pension Protection Act of 2006 (PPA) tightened up pension funding requirements; but it included special rules for airlines, that allowed special exemptions on interest rates used to project funding levels. The exemptions were aimed at helping airlines hit by the aftermath of recession and the impact on travel from the 9/11 attacks in 2001.
American and other carriers were granted additional changes in 2007. They had argued that the 2006 rules created an uneven playing field in the airline industry because pension plans that had already been frozen were given more favorable funding terms than plans like American's, which were still operating.
PBGC's Gotbaum calls the 2007 changes -- which were tacked onto a funding appropriation measure for the Iraq war at the 11th hour -- "midnight pension relief." He claims that the law saved American Airlines $1 billion -- that has gone straight into its "bankruptcy war chest" -- and that it constitutes 25 percent of the $4 billion in cash on hand at the company.
"The pension relief was very important to American Airlines," says a spokesman for the company. "Without it, we would have been forced to seek restructuring sooner than we did. We've worked hard the past decade to stay out of bankruptcy court, but we ran out of time."
American filed for Chapter 11 bankruptcy protection in November 2011.
American says it made no secret of the changes it was seeking. Pension relief proposals often get a sympathetic hearing on Capitol Hill, where concerns often focus on preservation of jobs. In the case of airlines, lawmakers from small communities also worry about the economic impact of lost service to their communities.
"We all supported it," says James Little, president of the Transport Workers Union, the largest union at American. "We were up there with the flight attendants and pilots," he says. "It was the right thing at the time, but their attempt to terminate the plans now is a crime -- there's just not yellow tape around the building."
Little points to concessions made by American's unions in 2003 on work rules and 30 percent cuts in pay and non-pension benefits, which were made to help the airline stay out of bankruptcy. "Pensions and retiree medical were the pillars for us in 2003," he says. "We agreed to gut everything else."
American was the last major U.S. airline fighting to keep its head above water without bankruptcy reorganization. CEO Gerard Arpey often described that effort as a moral battle, because he didn't want the company to use bankruptcy to shed its obligations to shareholders and retirees. The airline board's decision to file for bankruptcy last November prompted Arpey to resign.
"We want companies to be able to thrive in a recessionary economy, and understand that many are facing huge challenges," says Karen Friedman, executive vice president of the Pension Rights Center. "The question is, do they have to do so on the backs of workers and retirees? Pensions are long-term commitments to workers, who often have given up wages throughout their working lives so that companies can keep funding the pension plans."
The use of bankruptcy court to shed pensions also raises questions about the long-term viability of the PBGC, and potential burden on taxpayers. While the PBGC has plenty of cash on hand to meet near-term obligations, the pressures could become unmanageable if a succession of under-funded plans were transferred to the agency.
The PBGC has asked Congress for the flexibility to raise premiums to help close the deficit, so far without success. Gotbaum says if premiums aren't raised and the deficit grows, the agency would, at some point, have to stop paying benefits or seek a taxpayer bailout from Congress.
Debate about pension plan health vs. jobs likely will accelerate this year as plan sponsors begin lobbying for a new round of relief from funding rules due to the current environment of ultra-low interest rates. The low rates available to pension plan managers reduce returns on portfolios, which in turn requires them to make cash injections to maintain funding levels required by law.
The changes sought by sponsors would allow plans to smooth out rate volatility, and give them more time to meet funding requirements -- allowing them to retain capital for non-pension purposes.
(Editing by Jilian Mincer and Andrea Evans)