From the boardroom of a bankrupt company, abandoning pension
obligations is typically portrayed as a do-or-die decision.
"As difficult as this was, it was certainly better than liquidating
the company," Glenn Tilton, chairman of United Airlines parent UAL Corp., told a
San Francisco audience in October.
Delphi Corp. Chairman and Chief Executive Robert "Steve" Miller, a
restructuring specialist who led Bethlehem Steel through its turnaround and now
sits on the board of United Airlines, said liquidation was the stark choice
faced by the nation's second-biggest airline.
Though bankruptcy provides a legal framework for shedding costly
retirement plans, critics argue that executives are abusing the law to pull off
otherwise impossible corporate turnarounds.
"That's just flat untrue," Miller said, noting U.S. bankruptcy law
sets a high bar for any company trying to prove it can no longer support its
retirement plans. "You cannot just willy-nilly get out because you feel like
it," he said.
Miller pointed out that distressed companies don't always turn over
their pensions to the PBGC. Bethlehem Steel aside, he said he'd saved the
pensions at 9 out of the 10 companies he led through restructurings.
"As far as I'm concerned, hell no, the pension does not have to
go," Miller said. And that carries over to his role at Delphi. "A bedrock
principle of the reorganization we are doing at Delphi is to preserve our
accumulated benefits and not turn this over to the PBGC," he said.
For employees, the change at a company can be a stark one as new
hires arrive without ever knowing that compact between employee and employer.
Instead, the weight of managing retirement risk falls on a worker's shoulders
with defined contribution plans like the 401(k).
"Now from day one, they have to take an active role in planning for
retirement," said United Airlines flight attendants union spokeswoman Sara
Nelson Dela Cruz, who is involved in training. "The employee is responsible for
their retirement."
The United flight attendants union was the only one to aggressively
fight the termination of its pension plan.
The United Airlines pension default last year was the largest in
the history of the agency, ahead of Bethlehem Steel. The bailout covered 120,000
workers and took on $10 billion in obligations. The PBGC loss totaled $6.6
billion, more than twice US Airways and well ahead of the $3.7 billion hit from
Bethlehem Steel, bringing the PBGC's current deficit to about $23 billion.
Those numbers pale compared with the $108 billion deficit staring
down the agency.
"If plans have some indication that they may terminate or they may
not succeed, that could just skyrocket out of control," said Rep. George Miller,
D-Calif., who has many United Airlines employees in his district.
But there are glimmers of hope. As interest rates rise and stock
market returns improve, that gap could shrink or disappear altogether. But
that's out of the agency's control.
"What we do know is we can fully expect that there will be
additional terminations going into the PBGC. That adds to their deficit and
makes it less secure," said Rep. Miller. "Obviously, then you have to try get
more money from companies or from the taxpayers to keep that fund solvent."
Government bailouts haven't been in the headlines for years but the
memory of the Federal Savings and Loan Insurance Corp.'s insolvency in 1986 and
eventual demise is still strong.
Staying afloat
The airline industry's meltdown after the Sept. 11, 2001 attacks
and the outbreak of Severe Acute Respiratory Syndrome, or SARS, in 2003 nearly
ruined the industry.
United Airlines, ATA Airlines, Air Canada, Delta Air Lines,
Northwest Airlines and Aloha Airlines all sought bankruptcy protection from
their creditors while they slashed costs and rebuilt their shattered finances.
US Airways even filed for bankruptcy twice before being rescued in a takeover by
smaller America West.
Steel industry turnarounds pushed the limits of how much the PBGC
could, and should, endure. Bethlehem Steel's pensions plainly showed the weight
being shouldered by current employees.
Those plans, which left the PBGC to cover $3.7 billion of its $4.3
billion deficit in 2002, covered retirement packages held by 95,000 current and
former employees.
Of the 95,000, only 13,000 were still active workers, according to
the PBGC. The rest were retired employees (67,000) or former employees (15,000)
entitled to benefits when they retire.
Earlier that year, LTV Corp.'s 82,000-strong pension plans were
absorbed by the PBGC. It included 53,000 retired workers, more than those still
on the job.
This fits a broader pattern of retirees now far exceeding the
number of active employees needed to cover their benefits, according to the
Heritage Foundation's David John.
"What you will see is that you have fewer and fewer younger workers
that are being covered by the traditional pensions," he said.
Some blue-chip companies are taking defensive measures by stopping
the accumulation of benefits in their plans. IBM, for example, froze its
employees' pensions earlier this year, offering a defined contribution plan, or
401k, in its place. General Motors took this step for its white-collar workers,
too, as did Verizon Communications (VZ) .
Beyond the courts
But the apparent ease with which troubled companies can now cast
off costly pension plans is troubling to companies still meeting their
obligations, especially when they are direct competitors.
For example, American Airlines is still squared off against US
Airways and United Airlines, both of which ejected their pension plans while in
bankruptcy. The situation gets even worse if bankruptcy court judges allow
Northwest and Delta to ditch their pension plans.
"It is certainly a legitimate issue and concern on their part that
they will have to compete against rivals that have been able to offload their
ongoing labor costs on the federal pension insurance program," said PBGC's Belt.
"It also should be noted that the pension insurance program is not a mechanism
that is designed to make the company more competitive."
But that's what happened, creating an escape for companies
desperately seeking to shed costs.
"In United's case, and we're going to see this in the case of Delta
and Northwest, there is no way they can compete worldwide with the cost of that
pension plan hanging over their head," said the Heritage Foundation's David
John.
And in such cases, a bankruptcy court judge will always put the
interests of a company ahead of the beleaguered PBGC.
"The actions that they've [United] taken are completely legal, but
make a PBGC bailout inevitable," said John.
According to the Center on Federal Financial Institutions, the
PBGC's coffers may be fully drained by 2020.
Lawmakers, pressured by constituents with their retirement at risk,
are working to change the laws that determine how big a premium companies must
pay and how long they have to shore up their plans.
Legislation aimed at fixing underfunded pensions through measures
like higher premiums could backfire if they make PBGC insurance too costly.
Meanwhile, laws allowing more time to fund plans are being discussed in
Congress.
Earlier this year, the PBGC started charging a company $30 per
employee to insure their retirement benefits. That increase, from $19, was the
first since 1991.
Delphi's Miller said he considers the annual PBGC premium to be
very low.
"The political dilemma is, if you run those rates up very high,
then solvent, healthy companies will resent being taxed to pay for the
relatively few industries that have been the principal source of the PBGC having
to pay up," Miller said. "By and large, I consider that guarantee to be a real
bargain given the lack of discipline companies have to observe in having a
defined benefit program."
August Cole is an editor for MarketWatch in
San Francisco.