The Coming Pensions Crunch


By Nanette Byrnes On a warm Saturday in August, a group of about 50 men and women gathered around picnic tables in Hempstead State Park on Long Island, N.Y., not far from Kennedy Airport, where most of them had worked for years. Taped to trees nearby were the still-familiar blue-globe logos of their former employer, Pan Am.

After a lunch of hamburgers and sodas, they listened intently as Leonard Beaumont and Al Pineiro, mechanics, spoke into a portable microphone. Officers of the Association of Former Pan Am Employees, the two were giving fellow members the news they had fought long to avoid: For almost all of them, there was no longer hope of regaining any of the pensions they had lost when Pan Am went bankrupt in 1991.

For 13 years this group has been fighting the Pension Benefits Guaranty Corp. (PBGC), the insurer of corporate pension plans, trying to get more money for their members, many of whom had worked for the airline for 20 or 30 years. Assets they thought would protect their pensions -- hotels, air terminals, even the famous Pan Am building in midtown Manhattan -- had disappeared, leaving their pensions a fraction of what they had planned on.

Now the group had finally run out of money and could no longer keep paying the lawyers who had been fighting for them in court, so their hopes for anything more vanished. "I hate it," said Beaumont, as he fought back tears.

"IRRATIONAL" CONTRIBUTIONS. It was a sad sight for those who had held onto hope -- and a sobering image for the employees of US Airways (UAIR), especially the 25,000 flight attendants and mechanics covered by the pension plans US Air says it may soon have to terminate. Now back in bankruptcy for the second time, the airline won't make a $110 million payment due to the plans on Sept. 15. The bankruptcy judge has approved the move, but the PBGC has objected. The bankruptcy court will hold a hearing on the matter on Oct. 7.

All told, US Air owes $531 million in pension contributions over the next five years, a burden that was on a short list of precipitating factors in the airline's bankruptcy filing.

Less than two months ago, United Airlines (UAL) declared that it, too, would stop contributing to its pension plans, leaving many to wonder if the PBGC can fulfill the obligations it likely will have to take on. Fueling that concern, a report released on Sept. 13 by the Center on Federal Financial Institutions warned that if the current state of affairs continues, the PBGC could run out of money in 2020. By conventional math, the agency is already insolvent.

Worried about the trend, the PBGC is asking Congress to give it a higher stature in bankruptcy claims. In a statement put out Sept. 14, the insurer, which now guarantees the pensions of 44 million workers, noted that in its bankruptcy filing, US Air said it would be "irrational" to make pension contributions because it "provides no benefit to the estate."

"That's a remarkable statement," says PBGC Executive Director Bradley D. Belt. "The company is saying it's irrational to keep your pension promises and to comply with federal pension law. Bankruptcy should not be the path of least resistance to deal with your pension obligations."

BAILING OUT. The airlines, along with steel companies, auto makers, and a number of other Rust Belt manufacturers, have been struggling with these costs for years. Now other problems, including high fuel costs and a hypercompetitive marketplace, have made coming up with the cash for these payments that much harder.

Vaughn Cordle, an analyst with Airline Forecasts, calculates that the top seven airline pensions are underfunded by $20.5 billion. By his math, United Airlines would have to pay $820 million a year for the next five years to fill its pension gap. That's equal to 6% of the airline's expected 2004 revenue. Delta Air Lines (DAL), which many worry could be the next to go, would have to put in $754 million a year for five years, 5% of its expected revenue.

Complicating the picture at Delta is the fact that many of its pilots are bailing out early, opting to take early lump-sum payments. This is pulling assets out of the plan at an alarming rate because Delta's pilots are the industry's highest-paid: A senior captain of a Boeing 767 at Delta makes about $240,000 per year, vs. $163,000 at United, where pay has already been cut substantially in recent years, according to aviation consulting firm, Air Inc.

Some 300 Delta pilots retired in June, up from an average of 30 per month. Delta was hit with a $117 million noncash settlement charge for lump-sum benefit payments in the second quarter -- a trend the airline expected to continue. Short of a deal to restructure its retirement plans with the pilots' union, Delta's pension hole could get deeper quick: About 2,000 of the airline's 6,900 pilots are 50 or older -- and therefore eligible to retire.

TENDENCY TO SKIMP. Not everyone will rush to do this. Pilots are something of a special case -- highly paid and often having large built-up pension balances. But the airline meltdown they're a part of is only the most glaring symptom of a much broader disease. Matthew H. Scanlan, a managing director of Barclays Global Investors, says 1,050 company pension plans were each more than $50 million underfunded at the end of 2003, and that the total funding shortfall in all corporate pensions was $279 billion.

One of the major culprits, notes M. Barton Waring, also a managing director of Barclays, is a tendency by companies to put as little as they can into their pensions, diverting cash instead to other areas of the business. "Under the pressure of day-to-day life, many corporations have not put the money in," says Waring.

The PBGC can't handle all that seems to be headed its way. The agency has its own deficit of $9 billion to $15 billion, depending on the calculation. The PBGC, which is funded by insurance premiums levied on all participating plans and which also absorbs what assets are in a pension plan when it takes one over, has long been arguing for stronger funding requirements. On Sept. 14, Representative John Boehner (R-Ohio), chairman of the House Education & Workforce Committee, joined in, called for "comprehensive reform" of the pension laws.

If the airlines crisis is enough to push pension reform to the front of the congressional agenda, that would at least be a bit of good coming out of what many agree is a disaster for this industry. But that's cold comfort to the potential financial problems that await more airline retirees down the road. With Lorraine Woellert and Amy Borrus in Washington, and Brian Grow in Atlanta

Byrnes is a senior writer for BusinessWeek in New York


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