AMR Asks to Eliminate Certain Pension Payments

November 30, 2012 ( – AMR asked a bankruptcy judge to allow an amendment to its pilots’ pension plan eliminating certain optional forms of benefit.

Specifically, American Airlines’ parent company, asked that the court approve the adoption of an amendment to the American Airlines Inc. Pilot Retirement Benefit Program Fixed Income Plan eliminating the lump sum and installment payment options provided for in the plan, saying it is necessary to avoid a distress termination or an involuntary termination of the plan prior to completion of the company’s reorganization under bankruptcy.  

“[I]f pilots could continue to receive a lump sum upon the Debtors’ emergence from chapter 11, it would fuel a massive wave of pilot retirements. These retirements would create a pilot shortage which, in turn, would result in an operational crisis involving the wholesale cancellation of flights and the grounding of airplanes, with a corresponding devastating reduction in revenue and profitability.In short, if American cannot eliminate the principal motivation for this wave of retirements and preserve its ability to meet its business plan by enacting the Amendment, it will have no choice but to terminate the Pilot Plan,” AMR said in its filing.  

AMR noted that while the bankruptcy case is pending, the Pilot Plan is prohibited under Internal Revenue Code section 436 from paying benefits in the form of lump sums unless the plan’s Adjusted Funding Target Attainment Percentage (AFTAP)—a measure of a plan’s funded level—is at least 100%.Since the company filed bankruptcy, the Pilot Plan’s AFTAP has been less than 100%, and is not expected to reach 100% while in bankruptcy. American said that upon emergence from chapter 11, however, the Pilot Plan would be allowed to pay lump sums if its AFTAP is at least 80% and partial lump sums are permitted if the AFTAP is at least 60%.

The filing also noted that under the regulation, an employee benefit plan sponsor that is a debtor in a bankruptcy case may amend its defined benefit pension plan to eliminate a lump-sum option if the following four conditions are met: 

  • The plan's “enrolled actuary”the actuary responsible for calculating the contribution required for a given plan yearhas certified that, for the plan year for which the amendment is being sought, the plan's AFTAP is less than 100%;   
  • The plan is at the time not permitted to make any prohibited paymentgenerally a payment that is in excess of the monthly amounts payable under a single life annuitybecause the plan sponsor is a debtor in a bankruptcy case;   
  • The bankruptcy court has issued an order stating that the adoption of the amendment is necessary to avoid a distress termination or an involuntary termination of the plan prior to completion of the bankruptcy case; and   
  • The Pension Benefit Guaranty Corporation (PBGC) has issued a determination that the amendment is necessary to avoid termination of the plan prior to completion of the bankruptcy case and that plan assets are insufficient to cover all PBGC-guaranteed benefits. 


AMR said it has completed a submission to the PBGC for a determination and expects the agency will make its determination prior to the hearing date for the motion.    

In March, American decided to freeze its pensions instead of terminate them as it reorganizes under bankruptcy, (see  “American Airlines Decides to Freeze Pensions”). In June, the company asked to be allowed to stop providing health care and life insurance benefits to current retirees, (see  “American Asks to Stop Retiree Health Care Benefits”).  

AMR’s filing is at