United leaves others to pick up the pieces

If the Pension Benefit Guaranty Corp. were an airplane, passengers would be instructed to place their seats in the upright position, secure their trays, and prepare for a bumpy landing. Employees of United Airlines know the drill all too well.

Last week, a U.S. Bankruptcy Court in Illinois allowed United to transfer four underfunded pension plans to the PBGC, which insures private-sector pension plans in much the same way the Federal Deposit Insurance Corp. insures bank deposits. If the bank fails, customers get 100 percent of their deposits back, up to a limit of $100,000. If a company fails, the PBGC insures employees will get their pensions, up to a limit of $46,613 annually for those who work until age 65. Generous as that will sound to many in Spokane who would take a paycheck like that in a heartbeat, for pilots and others at the top of United’s pay scale, $46,000 represents as little as half what they had expected or were receiving.

Kaiser Aluminum retirees know the feeling. PBGC rules blocked some from receiving full benefits when the company transferred $566 million in obligations to the insurer in 2004.

What the PBGC gets from United are pension plans with $9.8 billion in obligations. The agency will cover only about $5 billion of that, hence the steep cuts facing some beneficiaries. The PBGC will also receive $1.5 billion in notes and convertible securities that might allow the insurer to recoup some of its funds later from a healthier United.

Transferring its pension problems to the PBGC will save United an estimated $645 million a year and move the company closer to the day it emerges from bankruptcy, which it filed in December 2002. United has lost $6 billion since then, and company executives keep moving the goalposts as escalating fuel costs and other problems overtake their plans. The new target is this fall.

By then, hopefully, the PBGC’s worsening financial situation will have Congress well on its way toward reforms that will shore up the pension system. With the takeover of United’s plan, the PBGC will be $23 billion in the red. That total will jump higher if other airlines with pension woes also seek bankruptcy and take the PBGC offramp. Companies in other industries could follow.

A meltdown could put taxpayers where they were in the 1980s; bailing out the PBGC to the tune of maybe twice the $100 billion it took to salvage the savings and loan industry.

The Bush Administration in January submitted a reform proposal that squarely addresses the problem. Too squarely, for some. Besides increasing premiums more than 50 percent, the plan would give companies with underfunded plans seven years to catch up. Premiums would also be adjusted according to a company’s credit rating. Employers would be encouraged to overfund plans during good years.

Though anxious for a solution, the American Benefits Council says the Bush plan may be too harsh.

Vice President Lynn Dudley says the council, which represents large employers, has a problem with linking premiums to creditworthiness. Most companies with debt rated “junk” eventually restore their credit rating, she says. Higher PBGC premiums will make improvement more difficult.

Companies also should be more free to overfund plans during good years so they can ride out downturns in the business cycle, Dudley says. But mostly, she adds, companies should be allowed to calculate return on pension reserves using an index based on corporate bonds, not U.S. Treasury securities. Reliance on Treasury rates understates the financial health of the corporate pensions, as well as the PBGC itself.

Surprisingly, Dudley found some value in a proposal from Democrats that would link worker pensions to those of executives, whose multimillion-dollar retirement packages never seem to shrink, whatever a corporation’s financial situation. Although stressing the differences between the types of plans involved, she says, “We will tend to be sensitive to that issue.”

Dudley says she hopes Congress maintains its traditionally non-partisan approach to addressing pension issues. Private pension plans hold $4 trillion in assets and pay out $120 billion in benefits annually, income low-saving Americans need badly.

“We simply don’t have anything else,” Dudley says.

United’s woes, at least, have focused attention on its problems.

The airline’s chief executive officer, by the way, is Glenn Tilton, who came aboard shortly before United filed bankruptcy. He has a $4.5 million United pension locked away in a trust. He received a $3 million signing bonus, plus stock, when he joined the company, and has drawn almost $2 million in pay since.

And yet the bankruptcy drags on. Seems the one aircraft maneuver the former Chevron vice chairman has surely mastered is the stall.