UAL Unfunded Pension Set at $2.5bn

May 6, 2002 ( - In addition to its many other fiscal woes, UAL Corp. must also cope with $2.5 billion in unfunded pension liabilities.

According to a Chicago Business news report, the level of UAL’s unfunded pension liabilities tripled from 2000’s level of $741 million. UAL is the parent company of United Airlines.

To preserve cash, the battered UAL has suspended contributions to the plan. That only buys the airline company some time before it must close the pension-funding gap, according to Chicago Business.

Never miss a story — sign up for PLANSPONSOR newsletters to keep up on the latest retirement plan benefits news.

UAL’s current pension levels represent a dramatic turnaround from as recently as two years ago when the airline company boasted a $1.3-billion surplus – about 18% more assets than liabilities. Credit the 1990s bull market and a policy decision to fully fund its pension after UAL became employee owned in 1994 for that success, the Chicago Business report said.

Holding Back Pension Payments

However, the company held back a required payment on September 15 2001 because of the industry upheaval after the September 11 terrorist attacks. Frederic Brace, UAL’s senior vice president and chief financial officer, told Chicago Business that UAL may also put off its annual 2002 contribution because of its continuing fiscal uncertainties.

Meanwhile, its pension assets dropped 11%, or $457 million, in value last year, and gained only $21 million in 2000, far less than the $1.5-billion total return expected for those years.

The double-edged impact of stock market losses and lower interest rates cut through the pension plans of many US corporations in the last two years, forcing huge increases in contributions.

UAL’s precarious pension funding level is likely to generate unavoidable pressure to step up the company’s pension contributions to the previous level and then some, if there isn’t a major stock market turnaround anytime soon.

New Contracts

Adding to the mess will be pressure from recent labor agreements, which bestowed industry-leading pension benefits as well as pay.

For example, the recent tentative agreement with UAL’s customer service agents, represented by District 141 of the International Association. of Machinists and Aerospace Workers union, increases pension benefits by 29.5% for someone retiring on July 1, 2002. Wait three years and that employee walks away with 49.9% more in benefits than under the old contract.

Finally, UAL could face a significantly higher pension contribution by 2004 if its unfunded liability level isn’t reduced. When pension plans are significantly underfunded, special rules kick in requiring larger contributions and higher federal insurance premiums.