Delta Deep-Sixes Executive Pension Plan Payments

August 12, 2003 ( - Delta Air Lines has announced it will discontinue funding of its supplemental executive retirement plan (SERP).

The $45 million SERP, often identified as a bankruptcy-proof pension program, establishes a trust for 35 employees that the world’s number three air carrier said were vital to the company in this time of pressure on the airline industry. However, even though the $20 million dollars in future payments have been axed, the executives currently enrolled in the plan will still be allowed their share of the trust funds whenever they leave the company, according to a Wall Street Journal report.

Further, the air carrier announced its top five executives would forgo 2003 bonuses. The top two officers of the company had already renounced any such payment under terms established by Congress when it approved aid to the airlines earlier this year.


Overall though, it is the SERP that has thrown a wrench in Delta’s effort to win crucial pay and other concessions from its pilots union. Delta has asked its pilots – who currently earn from $45,000 a year for new pilots to more than $250,000 for a small group of 30-year veteran captains – for a 26.5% pay cut and cancellation of a 4.5% raise next year. It also wants a later round of talks to negotiate changes to work rules to raise productivity (See Delta Pilots Mad At Pay Cut Proposal ) .

The Air Line Pilots Association, which represents more than 9,000 Delta pilots, has offered to take less-drastic wage cuts but wants its contract extended to 2008, plus a combination of stock options, profit sharing and bonuses. Talks with the union reached a stalemate in recent weeks with no word yet on rather the move by Delta will have any impact on negotiations with the union, which is still reviewing the cuts.

In a letter to employees earlier this week, Delta’s Chief Executive Officer Leo Mullin acknowledged that the company’s effort to cut costs, including asking the union for wage concessions, has been affected by the pension controversy. “The intention has been clear: Make further tangible sacrifices in executive compensation; eliminate, as much as possible, any sense of ‘we versus they’ on compensation philosophy, such that everyone appreciates we are all in this together.”

However, Delta has made no bones about the perceived necessity of the program, and had continued to fund the plan despite criticism from all fronts. As recently as March 28 Delta made its second round of payments into the pension trusts totaling $19.6 million, which included the executives’ current tax liability for receiving the payments. This came after the company paid $25.5 million in 2002 to establish the pension trust for the then 33 executives. Those payments, along with hefty performance bonuses for top executives, ignited a firestorm of criticism when they were disclosed in regulatory filings this spring (See US Airways President Says Peers Make Too Much ).

Pension Problems

The pilots union is also bothered by the fact that Delta’s largest employee pension plan is underfunded by about $4.9 billion – the largest such liability in the airline industry (See Delta Hit with ‘Substantial’ Pension Charge, Fitch: Airlines’ Pension Picture ‘Most Dire’ ) . That means the plan would likely be canceled in a bankruptcy and the workers would be left with whatever PBGC or company guarantees they have (See PBGC Head Paints Gloomy Picture for 2003 – and Beyond ). Under federal pension law, the maximum guaranteed pension at age 65 for participants in plans that terminate in 2003 is $43,977.24 a year. Maximum guarantees are adjusted for retirees older or younger than age 65 and for those who choose survivor benefits.

This comes at a time when executive pension plans across the country have been increasingly scrutinized (See Executive Privilege ). In April failure to disclose a similar plan at AMR Corp., the parent company of American Airlines, ultimately led to the departure of CEO Donald Carty (See Executive Comp Issue Could Ground AMR Labor Deal).