A fact sheet released by the American Academy of Actuaries (AAA) suggests that the termination of United Airlines’ pension plans (see United Pension Hearing Delayed, but Okayed by Court ) will likely not increase the projected deficit of the Pension Benefit Guaranty Corporation – and may even help reduce it.
“The PBGC already included United Airlines’ pension plans as a ‘probable termination’ in its 2004 annual report. That means the termination of the plans will have no appreciable impact on the PBGC’s deficit,” said Ron Gebhardtsbauer, senior pension fellow at the American Academy of Actuaries in a press release. “In fact, the $1.5 billion in securities the PBGC may receive as part of the termination agreement could help to reduce the PBGC’s deficit.”
On May 10, a bankruptcy judge approved United Airlines’ request to terminate its pension plans. The PBGC will take over the UAL pension plans. In return, the PBGC may receive up to approximately $1.5 billion in securities for the reorganized airline (see United, PBGC Hammer Out Plan Takeover Pact ).
The four plans cover 121,500 participants and are collectively underfunded by $9.8 billion, but the PBGC will not take on that full liability. Specifically, it will not pay the $3.2 billion in nonguaranteed benefits, which consist of certain benefits above the maximum guaranteed and recent benefit improvements that have not been fully phased-in. The maximum guaranteed benefit by the PBGC for plans terminated in 2005 is $3,801.14 per month (or $45,613.68 per year) for a worker retiring at age 65. There is a lower guarantee for those individuals who retire early or if there is a benefit for a survivor (details on those guarantees are online HERE ).
According to the PBGC’s 2004 annual report, it had a $23.3 billion deficit, which included $16.9 billion for probable terminations (see PBGC Posts Record Deficit in FY2004 ). According to the AAA, in its 2004 annual report, the PBGC included $16.9 billion for certain probable terminations, which included United Airlines’ unfunded guaranteed benefits. And, since that report did not contemplate the PBGC “gain” of the $1.5 billion in securities from UAL, the final result could actually decrease the PBGC’s projected deficit. “The PBGC had the foresight to include the liabilities it has assumed from United Airlines’ pension plans in its deficit projections,” said Gebhardtsbauer.
Of course, a “better-than-projected” result is not the same as “better.” However, the negotiations on the part of the PBGC reflect what has, in recent years, been a more aggressive posture in how the nation’s private pension insurer responds to troubled pension plans. In the case of United, the PBGC expressed its dissatisfaction early in the process – first by protesting against a series of modifications to the Deficit Reduction Contribution (DRC) rules in 2004 (see PBGC Calls Out DRC Modifications ), which gave certain industries (including airlines) greater latitude in complying with their funding obligations, and more recently by objecting to an agreement between United and its pilots’ union (see PBGC Opposed to Latest United Pilot’s Agreement ). President Bush signed a pension reform bill last April that granted the pension funding latitude (see Whew! Bush Signs Pension Relief, , IMHO: Wait Loss ).
The PBGC has also been successful in forestalling efforts by the steel industry – another huge industry source of pension funding problems – to foist so-call shutdown benefits on the nation’s private pension insurer (see High Court Lets Stand Shutdown Benefit Decision ). In court, the PBGC had argued it was not responsible for the benefits because the company never paid premiums to ensure the shutdown pensions would be paid. Shutdown pensions are paid to workers who reach certain tenure and age levels. In the volatile steel industry, they were long seen as a cushion for workers if they lost jobs before full retirement age. The shutdown pensions could be used as a cushion, too, if workers had to take lower-paying jobs (see Steelworkers Plan “Shutdown Benefits” Showdown ).
The American Academy of Actuaries is the public policy organization for actuaries of all specialties within the United States. In addition to setting qualification standards and standards of actuarial practice, a major purpose of the Academy is to act as the public information organization for the profession. The Academy has proposed a series of legislative and regulatory reforms to strengthen the defined benefit pension system. You can read more at http://www.actuary.org