The union that represents pilots at United Airlines said yesterday that it had struck a deal that would allow the airline to terminate the pilots' ailing pension plan and partly compensate them for the loss. It is unclear, however, whether the agreement will withstand legal scrutiny.
Before a company can default on a pension plan, it must convince a federal bankruptcy judge that its survival hangs in the balance. United has not yet done that. And with the federal pension insurance program in shaky condition, the government is unlikely to favor any arrangement that makes it too easy for the airline to walk away from its obligations.
The executive director of the Pension Benefit Guaranty Corporation, Bradley Belt, issued a statement yesterday saying the tentative agreement appeared to set "a dangerous precedent," and hinting that the agency might try to block it. The agency, which provides pension insurance similar to the government's insurance for bank deposits, has until Dec. 30 to file any such motion in bankruptcy court.
Stephen Presser, the financial adviser for United's pilots, said it had been quite difficult for the airline and the union to agree on an acceptable way to terminate the pension plan. If the agreement is allowed, he said, it could become a model for other distressed companies to follow.
Under the agreement, United would compensate active pilots for the loss of their pension plan by sweetening its contributions to a separate, existing retirement plan for pilots structured much like a 401(k) plan. In addition, United would issue its active pilots $550 million worth of notes, convertible to common stock once the airline has emerged from bankruptcy.
The arrangement does not offer any compensation to United's retired pilots, who are not represented by the Air Line Pilots Association. Some of them will lose part of their benefits if the pension plan is terminated, as expected.
In addition to sweetening the active pilots' compensation, the agreement would require United to keep the pilots' pension plan afloat until at least May 2005, a provision intended to get the pilots as much coverage as possible from the pension insurance program. The government does not fully insure pension increases from the date they are offered, because it does not want companies to promise big benefits just before they default. Instead, the insurance coverage phases in over five years.
United's pilots won their last pension increase in April 2000, so by waiting until next May to terminate the plan, the airline and its pilots would complete the entire phase-in period.
Gary Ford, the pension agency's former general counsel, said he thought that provision might provoke the government to take the rare step of seizing the pilots' pension plan. United has already stopped making its mandatory quarterly contributions to the plan. Delaying the termination to take advantage of the insurance rules as well could be grounds for seizure, said Mr. Ford, now a partner at the Groom Law Group, in Washington.
Mr. Belt said the pension agency was "scrutinizing this agreement very closely" and would "take all appropriate steps to protect the financial interests of the pension insurance program."
He also said he was troubled by a provision of the agreement requiring United to terminate all of its other employee pension funds if it terminated the pilots' plan. He said neither the pilots' union nor United, a unit of UAL, had any authority to decide what would happen to the other employees' pensions. In any case, the agreement did not propose to compensate the other employee groups for their lost benefits.
The question of how to compensate employees after a pension default has been a touchy one since 1986, when LTV Steel filed for bankruptcy, transferred four heavily underfunded pension plans to the insurance agency, then resumed operations, promising employees new pensions just as rich as the old ones.
The Pension Benefit Guaranty Corporation sued LTV, and the case went to the Supreme Court, which ruled that LTV had to take back the plans. Because of that situation, companies trying to emerge from bankruptcy have struggled to identify new ways of compensating their employees that do not constitute "abusive follow-on plans" under the precedent set in the LTV case.
Mr. Presser said he thought his idea would pass the government test because it offered the pilots $550 million worth of compensation that was not in the form of a plan. Therefore, he said, it could not be construed as an "abusive follow-on plan."