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For some time, I've wondered how long it would be before American Airlines Inc. terminates its pension plans and shifts the massive unfunded liability to the Pension Benefit Guaranty Corp.
This year alone, parent company AMR Corp. paid more than $500 million into the plans to meet federal funding requirements, an expense that major competitors, such as United Airlines Inc. and US Airways Group Inc., don't have because those airlines folded their plans years ago as part of bankruptcy reorganization.
In the highly competitive airline industry, it is hard to imagine that American, whose parent company filed for Chapter 11 bankruptcy reorganization last month, will retain all four of its pension plans in their current form. At minimum, American will freeze the plans, meaning participants will not earn benefits for future service and new employees will not be covered in the plans. But I think termination of the plans, and the big cost savings that would result, is the more likely scenario.
It isn't surprising that American's plans, which the PBGC estimates have about $8.3 billion in assets to pay $18.5 billion in promised benefits, are so underfunded. Virtually every pension plan has seen funding levels fall in recent years due to the slump in the equities market and decline in interest rates.
But in American's case, funding levels were weakened further by special interest provisions in legislation Congress passed in 2006 and 2007. Those provisions applied only to commercial airlines, giving them more time than other employers to fund liabilities and allowing them to use higher interest rate assumptions in valuing liabilities. This resulted in American contributing less to the plans than otherwise would have been required.
To me, that was terrible policy by federal lawmakers. By easing funding requirements, the day of reckoning was merely delayed, not avoided. American, like its competitors, no longer can afford to offer and pay for very generous pension benefits, especially those provided to pilots.
Now, the plans are more underfunded than ever. If American, as part of bankruptcy reorganization, folds the plans and shifts the liabilities to the PBGC, the result will be higher premiums that other employers with defined benefit plans pay the agency to fund its insurance programs.
Escalating PBGC premiums will give employers yet another disincentive to offer pension plans—something lawmakers should have considered when they eased funding requirements for American.