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FORT WORTH, Texas—American Airlines Inc.'s move to terminate its pension plans could launch a legal battle over the airline's plan to shift billions in unfunded benefits to the financially ailing Pension Benefit Guaranty Corp. and could affect the premiums that employers pay to the PBGC.
Ending months of speculation triggered in November by the Chapter 11 bankruptcy reorganization filing of parent AMR Corp., American Airlines said last week that it will seek bankruptcy court approval to terminate its massively underfunded pension plans.
“American's pension plans are very expensive—we spend more on them than our competitors spend on their retirement plans. We simply do not see a way we can secure the company's future without terminating our defined benefit plans,” the Fort Worth, Texas-based airline said in a statement, which also detailed extensive job cuts American intends to make.
“If this liability is not eliminated, we will need to have more than $800 million each year in additional savings to service the unfunded liabilities,” said the airline, which had net losses of nearly $4 billion from 2008 through 2010. 2011 results are not yet available.
If the four plans, which have about 130,000 participants, are taken over by the PBGC, it would be the largest loss in the agency's history.
According to preliminary PBGC estimates, the plans have about $8.3 billion in assets and about $18.5 billion in promised benefits. If they fold, the PBGC would be liable for about $17 billion in benefits, resulting in an $8.7 billion loss to the agency.
That would eclipse the previous PBGC record loss, $7.4 billion in its 2005 takeover of five United Airlines' pension plans.
PBGC Director Joshua Gotbaum says the agency will oppose the termination, noting that the airline has yet to prove it no longer can afford the plans.
“Before American takes such a drastic action as killing the pension plans of 130,000 employees and retirees, it needs to show there is no better alternative. Thus far, they have declined to provide even the most basic information to decide that,” Mr. Gotbaum said in a statement.
Pension observers, though, say the PBGC faces long odds in convincing the bankruptcy court that American Airlines can afford the plans.
“Usually, judges rule in favor of the debtor,” a Washington pension attorney said, noting that bankruptcy courts want to ensure a successful reorganization and the debtor's exit from bankruptcy.
Still, the PBGC has had successes. The agency cited Visteon Corp., a former Ford Motor Co. parts unit that intended in 2009 to terminate three of its pension plans as part of bankruptcy reorganization.
“We showed Visteon they could reorganize successfully without terminating their employees' plans. Today, the company's 23,000 workers and retirees continue to receive the benefits they've earned,” Mr. Gotbaum said in a statement last month.
In some situations, though, the PBGC dropped opposition to plan termination—an example being United's pension plans—after evidence showed the plan sponsor could not successfully emerge from bankruptcy and still fund the plans.
“We opposed termination for as long as there was an economic case to be made that one or more of the plans were affordable. As UAL's financial condition continued to worsen, we could no longer make the case of plan affordability,” the PBGC said in a statement.
If the PBGC were to take over American Airlines' plans, the agency's record 2011 deficit of $26 billion could jump nearly one-third, putting more pressure on Congress to take action to prevent the agency from eventually running out of cash to pay guaranteed benefits to participants in the nearly 4,300 failed plans the agency has taken over.
All of the options before lawmakers to prevent that from happening are unattractive, said Bradley Belt, a former PBGC executive director and now senior managing director with think tank Milken Institute in Washington. Those options are raising premiums that all employers with defined benefit plans pay the PBGC, cutting benefit guarantees or seeking a taxpayer-funded bailout.
“There are no easy choices, but at the end of the day, the hole has to be filled,” Mr. Belt said.
“There will have to be some kind of adjustment,” said John Ehrhardt, a principal with Milliman Inc. in New York.
Currently, employers pay a base annual premium of $35 per plan participant, while underfunded plan sponsors pay an additional $9 per $1,000 of plan underfunding.
Even before American Airlines announced its intent to terminate its plans, the PBGC in September asked Congress for a substantial hike in premiums as well as authority to set future premium levels. No congressional action has been taken yet on that proposal.
While it's difficult to project if other big underfunded pension plan terminations will be on the horizon, a key variable will be the future health of the economy, said Jonathan Barry, a partner in the Boston office of Mercer L.L.C.
What is encouraging, though, is that some large companies are increasing plan contributions significantly, Mr. Ehrhardt said.
For example, Ford recently said it is contributing about $3.5 billion to its plans this year, up from about $1.1 billion last year.
A simple rise in investment interest rates could reduce required contributions by pension plan sponsors, experts say.
“If, as many expect, today's extraordinarily low interest rates return to historical levels, many of the pension liability challenges facing the PBGC and employers alike will be significantly eased,” said Jim Keightley, a former PBGC general counsel and now a partner with Keightley & Ashner L.L.P. in Washington.
FORT WORTH, Texas—If American Airlines Inc. terminates its four hugely underfunded pension plans, the responsibility for paying billions of dollars in benefits to plan participants will shift from the airline to the Pension Benefit Guaranty Corp.