"United Says Pensions' Termination Likely"

Friday, August 20, 2004

United Says Pensions' Termination Likely
Airline Looking to Cut Costs
By Keith L. Alexander and Albert B. Crenshaw
The Washington (DC) Post


Cash-strapped UAL Corp., parent of United Airlines, yesterday said that it
would "likely" terminate its four pension plans as part of its efforts to
further cut costs and emerge from bankruptcy. 

United's move, which must be approved by the bankruptcy court, would wipe
out nearly $2 billion in future retirement benefits for many of its 120,000
retirees and workers, according to a spokesman for the Pension Benefit
Guaranty Corp., the federal agency that insures corporate pension payments
up to certain maximum levels. 

With its hub at Washington's Dulles International Airport, United is one of
the area's largest employers. 

United's action would also dump billions of dollars in future pension
obligations onto an already financially strapped agency. The value of the
PBGC's assets on March 31 was $9.7 billion less than that of the future
benefits it is obligated to pay. Termination of United's plans could push
the agency's underfunding to about $15 billion. 

The PBGC estimates United's pension plans are about $8.3 billion
underfunded, which would make United's move the largest corporate pension
default, said agency spokesman Randy Clerihue. Prior to United, the biggest
default was in 2002 by Bethlehem Steel, whose terminated pension plan was
underfunded by about $3.6 billion. 

Clerihue said the PBGC would cover only about $6.4 billion of the
underfunding. The remaining $1.9 billion, he said, would be lost. 

"The size of that loss is unusual," Clerihue said. "In most of the plans we
take over, the participants usually get much of what they were promised." 

In a bankruptcy court filing, the nation's second-largest airline attributed
its move to the effect of high fuel prices and its inability to obtain a
loan guarantee from the federal government. If United terminates its pension
plans, pension experts say, the airline would likely replace them with a
defined-contribution plan such as a 401(k). 

Defined-benefit plans were once common but have been shrinking in number.
They promise a benefit based on a worker's pay and years of service. In such
plans, the employer funds the plan and bears the investment risk. It also
pays insurance premiums to the PBGC. 

In defined-contribution plans, workers, employers or both contribute to an
investment account for each worker, and the benefit is whatever is in that
account when the worker retires. 

United said in its court filing that it plans to examine options other than
terminating the plans but that "given the magnitude of further cost
reductions needed to create a viable business plan and attract exit
financing, termination and replacement of all our defined benefit pension
plans likely will be required." 

In a termination, the agency would receive the plans' assets and become
liable to pay the plans' benefits, but only up to about $44,000 a year.
Pilots, who have generous pensions and must retire by federal law at age 60,
would be hit particularly hard. Not only would their pension be over the
PBGC limit, but they would be subjected to lower limits because they begin
drawing benefits at a relatively young age -- much the way Social Security
works. 

The PBGC's Clerihue said it was "impossible" to determine how the move would
affect individual employees, although he added that current retirees are
likely to see less financial impact than workers who are nearing retirement.


United's employees have taken several financial blows during the years. In
1994, they agreed to a 20 percent cut in pay and benefits in exchange for a
55 percent stake in the airline. But United's 2002 bankruptcy filing
virtually wiped out the shares' value. 

When United filed for bankruptcy in 2002, employees agreed to about $2.5
billion a year in pay and benefits cuts. Now, as the airline seeks financing
to emerge from bankruptcy, United workers are bracing for another round of
concessions. 

Last month, the airline said that as part of its new financing agreement
with investors, it would not make payments into its pension plans while it
remained in bankruptcy. Labor leaders and PBGC officials have claimed that
move violated federal pension law. 

Opponents of United's moves are expected to appear before a federal
bankruptcy court judge today in Chicago. Joseph Tiberi, a spokesman for the
International Association of Machinists and Aerospace Workers, which
represents United's 20,000 customer service and ramp workers, said United's
move was expected. 

"Every action they've taken over the past month has indicated this was their
goal," Tiberi said. The union has filed a lawsuit against United and has
asked the bankruptcy court to appoint a trustee to oversee United's
operations. 

Beyond the immediate situation with United, the PBGC is greatly worried
about the possibility that other older, unionized carriers will follow
United into bankruptcy and try to shed their pensions -- as Arlington-based
US Airways previously did with its pilots' plan. 

Once these obligations are removed, the carriers have lower operating costs,
which can give them an advantage in the marketplace over carriers that still
have those costs. 

Companies are allowed to terminate underfunded plans if they can convince a
bankruptcy judge that they cannot reorganize with those obligations.
However, airline executives, like most corporate leaders, tend to view
bankruptcy as a last resort because of its impact on shareholders.



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