Pension Question for Chip (or anyone who knows)

[Bear96]

Hi Chip,
I have been watching the USAirways situation very closely as we at UAL are following the U game plan almost exactly, just a couple of months behind. So can you please clarify this for me.
You have mentioned in several threads that the U pension plans can be terminated pretty much at the whim of management, simply by giving the PBGC a 60-day notice, and that this would not violate current collective bargaining agreements.
This does not seem correct to me. If you have a defined benefit pension plan spelled out in your CBA, isn''t the company legally obligated to make the payments to keep the fund solvent, unless first any changes are negotiated (or granted after petitioning the bankruptcy judge)-- or until cash actually simply runs out, in which case the doors are being shut and Ch.7 is being declared anyway? Doing otherwise would represent a unilateral change to the agreement, similar to management saying one pay period, We are only paying everyone 50% of their pay in this paycheck because of our financial condition.
OK so there is a clause in the PBGC rules that says the company can terminate the plan with a 60 day notice. But that merely addresses the legal relationship between the employer and the PBGC-- but not the one between the employer and the union.
So my question is, what am I missing? How can U just decide to terminate the pension plans unilaterally without being in violation of the CBAs? Or don''t U''s CBA''s explicitly spell out defined benefit pension plans-- do they have language such as this group will get a pension benefit in accordance with company policy, which could indeed be changed at the whim of management, so that would answer my question, but our (UAL F/A) contract spells out specific defined benefits so I assume at least the pilots and F/As at U have similar defined benefit language.
I hope that makes sense. And I am curious to find out and understand the situation because I am sure we will be facing the same thing over here pretty soon.
Thanks.

 

[atlmd80]

I think the answer to your main question is: In BK those S1113 letters, that Capt. Mumm said everyone needs, are not really worth that much. The company goes to the judge and says they need to abrogate this contract. I think people are confused about this one. The judge does not change the contract, only cancels an existing one. Then the company adjusts changes the contract to what they want. If the other party agrees, the relationship continues. If the other party does not agree, in this case employees working without a contract, they can walk away(read strike).My opinion is that the PBGC was looking into the future and saw that the company was not going to be able to fully fund the pensions(They are a very big part in BK proceedings). The PBGC then is responsible to collect company assets to make up the difference between the current company funding level and the minimum funding level. I think what is going on with the employees is just public relations. The company knows what is going to happen, but now it will be the employees fault. Dave said all the unions have to agree or the Pension funds get changed.

 

[Bear96]

Thanks atlmd80 but that wasn't quite what I was asking.

I know that the company can petition the court to make changes to the pension language in the agreements. If they were to do that, then I would understand what is going on. But Chip is making it sound like management doesn't even have to take that step-- they can just decide today, on their own (as in, without having asked the court), to terminate the pension plans-- or quite contributing to them-- despite what is in the CBAs, and that would be legal (as in, not in violation of the CBAs). That's the part I don't get.

 

[mlt]

oldiebutgoody
please read the PBGC guidelines. There are 3 priority categories for normal pension payout. However, if it is not a normal payout (underfunded) the current and future retirees are credited with the percentage of funding at termination date. If the normal payout is larger than the percentage and yet falls within the PBGC guidelines they make up the difference. Almost all pensions for f/a's fall within the PBGC guidelines, therefore we will receive the value of our pension (as of termination date) at normal retirement age. However, ALPA's pension are way beyond the threshold; therefore, they will receive the percentage of funding (at termination date) at normal retirement age.

 

[Bear96]

Thanks mlt, but again that is not quite what I am asking. Really I am not trying to be difficult or stupid-- sorry this is becoming such an ordeal!

Let me put it this way. I know U management CAN do whatever they want, like decide to no longer make the minimum payments necessary to keep the pension plans funded, or (to use an example I gave earlier) decide to only pay employees 50% of what they are due in the next pay check. And I understand that to be kosher with the PBGC all they have to do is provide the 60-day notice to them.

But my question is, should U decide to terminate the pension funds WITHOUT petitioning the bankruptcy court or WITHOUT negotiating any changes, aren't they then in violation of the CBAs? Even if they gave the PBGC the 60-day notice, that still does not relieve them of their CBA obligations-- or does it? It seems to me they will have made a unilateral change to the CBAs.

The way Chip was talking (and so maybe only Chip can answer this), they can indeed do this WITHOUT being in violation of any CBAs. I don't understand how this can be (or maybe I am misunderstanding Chip), assuming your CBAs lay out the defined benefits of your pension plan the way ours do at UAL.

 

[mlt]

bear96,
There are two ways in which U is able to terminate AFA's pension; they must prove to the PBGC that they are unable to continue funding or the funding drops to 70% and in that case the PBGC would automatically step in. Should U voluntraily terminate the pension or the PBGC step in, all f/a's would receive at retirement age the plan's funding percentage in relation to their expected payout. Should the percentage of expected payout be less than the PBGC guidelines, the PBGC makes up the difference.

 

[oldiebutgoody]

[blockquote]
----------------
On 12/2/2002 5:22:58 PM mlt wrote:

bear96,
There are two ways in which U is able to terminate AFA's pension; they must prove to the PBGC that they are unable to continue funding or the funding drops to 70% and in that case the PBGC would automatically step in. Should U voluntraily terminate the pension or the PBGC step in, all f/a's would receive at retirement age the plan's funding percentage in relation to their expected payout. Should the percentage of expected payout be less than the PBGC guidelines, the PBGC makes up the difference.
----------------
[/blockquote]
Wrong!
The formula for what you receive is way more complicated than that (you should know that with the gov't running it it would be). Call the PBGC yourself and have it explained (I would explain it, but I'm not sure I understand it fully).

 

[Bear96]

In other words (to expand on my previous post), aren't there TWO independent obligations that have to be met to legally terminate the pensions:

1. Give the PBGC the 60-day notice; AND

2. Either negotiate changes to the pensions with the unions or petition the bankruptcy judge that these changes are necessary (which even still, would require negotiations with the unions to the point that an impasse is reached, in accordance with Section 1113 of the Bankruptcy Code, like any other contractual changes; the law requires that the parties try to negotiate changes mutually if at all possible before the judge steps in and imposes any changes).

The way Chip is talking, it sounds like U is only legally obligated to follow Step 1 above. So what am I missing concerning being able to skip or ignore Step 2?

Does this make sense to anyone or am I going crazy or missing something really really obvious? If so please connect the dots for me!

 

[chipmunn]

Bear96:

The pension issue is complicated, but let me tell you what I know. First, a company does not have to be in bankruptcy for the PBGC to seize the plan assets and plan termination is not a CBA function. The issue is not a contract violation nature, but instead is a financial inability of the company to meet PBGC guidelines because the company cannot provide a business plan that will support funding the retirement plan(s).

One important difference between UA and US is that US is in bankruptcy, thus the PBGC is a member of the creditors committee and is participating in the in-court restructuring.

However, the issues are the same for both UA and US in that both retirement plans do not have enough money to pay all of the benefits owed to its participants and the beneficiaries may be terminated if the employer meets one of the "distress termination" tests. To do so, however, the employer must prove that the controlled group is financially unable to support the plan.

In the case of US and probably UA, the company does meet the PBGC's "distress termination" tests and the airline can seek to have the plan cancelled.

What employees need to recognize is the pension issue is really a stand-alone issue because the numbers are so huge. 325 out of 360 S&P 500 company's who have defined benefit pension plans are expected to have underfunded retirement programs when the 2002 actuary information is released. Why? The meltdown of the bond yields and the equity bear market.

US management is trying to get the company’s pension numbers down to about a $300 million per year in annual corporate contributions going forward, which is a number that would not jeopardize the company and/or the federal loan guarantee, as part of management's restructuring discussions with the creditors committee and the PBGC.

It is my understanding to save the defined benefit plan(s), management is asking the PBGC to approve a payment schedule which has only been done once before, and apparently the PBGC is insisting that labor also be willing to sacrifice or else the PBGC won't even talk to management about saving the pension plans.

Unfortunately, the PBGC is dictating the terms and conditions to the airline, not the other way around.

Therefore, if management tells the PBGC and creditors committee it cannot meet the retirement payment schedule because labor did not provide additional concessions, the PBGC could immediately seize the assets regardless of the CBA's. Does management have a huge hammer over labor? Absolutely.

In fact, if management told the PBGC is cannot fund the plans, US could be relieved of approximately $500 million in labor expense per year from 2003 to 2009 if the PGGC terminated every union pension plan.

Bear96, I hope this answers your questions because I agree with you that UA and its employees are in the same boat as US employees.

Chip

 

[mlt]

Chip,
The funding waiver you are referring to also needs union approval. ERISA generally allows waivers, however not more than 3 years in a 15 consecutive year period. U's plan is to request a waiver of 30 years. A similar request was granted one time in history, however this company folded. If the PBGC grants the funding waiver and the unions sign off, there is one very frightning part that everyone needs to be aware of: during the waiver there cannot be any changes to the pension formula. In the event U returns to profitability, current and future employees who are a part of these collective bargaining agreements are locked in with no chance of an increase.

 

[Bear96]

Chip thanks for the explanation. It still seems to me though that should U go down this road they will be in violation of the CBAs, the same as if they decided not to pay everyone the rates called for in the contracts. But I suppose a company in U's condition could get away with that somehow.

UAL's pension funds are not yet "distressed," at least the F/A fund. According to statements released by UAL about two months ago, and verified by the AFA/UAL Retirement Committee, UAL has been making enough payments to date so that that fund's assets exceed its liabilities.

Certainly next year could be a different story though.