Senate Republicans Want AMR Pension Break Reconsidered

[WingNaPrayer]

WASHINGTON -(Dow Jones)- Senate Minority Whip Trent Lott, R-Miss., and Sen. Johnny Isakson, R-Ga., said Tuesday they are considering ways to repeal a pension funding break for AMR Corp.'s (AMR) American Airlines, inserted last month into a must-pass wartime spending bill.

That bill was signed into law May 26 and allows American Airlines, rival Continental Airlines Inc. (CAL) and some regional carriers to assume an 8.25% rate of return on pension assets when calculating pension underfunding.

Ever since Congress agreed last summer to allow airlines that have frozen their pension plans to use a more optimistic interest rate in calculating their pension obligations, American and Continental have been pushing allies in Congress to allow them to use similar assumptions for their ongoing pension plans.

Under the bill signed into law last month, American and Continental will be allowed to assume an 8.25% rate of return on their assets for ongoing pension plans. That's less than the 8.85% rate allowed airlines with frozen pension plans, including Northwest Airlines Corp. (NWA) and Delta Air Lines Inc. (DAL), but still about 2 percentage points higher than they would be required to assume under prior law.

"This is very, very bad," Lott said. "There is going to be substantial cost involved."

American Airlines' pension obligations are underfunded by roughly $2.4 billion according to the company's 2006 annual report. Lott and other opponents of the provision argue that it will allow American to avoid making pension fund contributions even as its pension obligations increase.

American and its allies in Congress have argued that it simply wants even footing with competitors Northwest and Delta, who under the 2006 Act can use the 8.85% rate in calculating their pension obligations.

"All we are asking is to be treated similarly," said Mary Frances Fagan, director of corporate communications for American, when discussing the airline's lobbying efforts in February.

Northwest and Delta in turn argue that they won the interest rate reprieve because their pension plans are frozen to new benefits and new beneficiaries.

"I don't think this issue is over," Isakson said Tuesday.

Isakson was in the thick of negotiations last year over what pension funding breaks to grant airlines as part of a broader overhaul of the nation's pension funding rules.

Isakson had promised at the time to work with American and Continental to address their concerns this year, so he said he was surprised to see the provision inserted into an unrelated spending bill without his knowledge.

Isakson and Lott plan to write the Pension Benefit Guaranty Corporation for a formal estimate of how much additional exposure the provision will create for the federal corporation.

PBGC is a federal corporation which guarantees pension benefits for defined benefit plans, including those offered by American, Continental, Delta, and Northwest.

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Guess they shouldn't have been so "in your face" with the bonuses, it made it look like they had more money than they needed and perhaps don't need the pension breaks after all.

Wierder things have happened!

 

[Boomer]

Until and unless we get the assumed rate of return for the last twenty years along with the data for the actuall returns and the actuall investments over that same period; no one really knows how fast or loose AMR has been playing with the money.


Call your Congressional Representative: demand that AMR and the PBGC jointly agree on an enforceable statement regarding the actual investments, and their actual resepective returns, so that a full measure of the obligations can be measured.

 

[eolesen]

I seem to remember seeing this a few years back -- with the exception of a couple of years, the actual interest rate was said to be running closer to 10%, while the 30-year Treasury bill was forcing assumptions of 6%.

 

[Boomer]

There is no reason for anyone to have to trust someones' memory with something like their pension.

The Congress passed the law preventing employees from forcing companies to provide the information about where pension funds were actually invested.

The Congress passed the law allowing companies to "book" anticipated returns as real despite the actual performance.

The Congress needs to un-"cluster" what they "clustered."

Allow employees to see the actual versus the claimed and check the books for themselves.

 

[WingNaPrayer]

UPDATE: Senate Panel Asks AMR, Continental For Pension Data

WASHINGTON -(Dow Jones)- Leaders of the Senate's tax writing panel are pressing AMR Corp. (AMR), parent of American Airlines, and Continental Airlines Inc. (CAL) for information on the possible impact of a pension funding break dropped into a recently enacted war-time spending bill.

Democratic leaders sidestepped the Senate Finance Committee by inserting the provision into the $95 billion spending bill. And now, the Democrat chairman and highest-ranking Republican on the committee are trying to "analyze the impact," according to a letter sent Wednesday to the companies.

"These two airlines flew around the Finance Committee to get this pension provision in the spending bill, but we will review in the light of day exactly what deal they got," said Finance Committee Chairman Max Baucus, D-Mont.

That spending bill was signed into law May 26 and allows American Airlines, operated by AMR, rival Continental and some regional carriers to assume an 8.25% rate of return on pension assets when calculating pension underfunding.

That's less than the 8.85% rate allowed airlines with frozen pension plans, including Northwest Airlines Corp. (NWA) and Delta Air Lines Inc. (DAL), but still about 2 percentage points higher than they would be required to assume under prior law.

Continental President Jeff Smisek defended the spending bill provision in a letter to the Wall Street Journal, published Wednesday.

"While Continental plans to make contributions to its pensions significantly above the amount legally required, this bipartisan solution corrects a disparity imposed on certain airlines by Congress as a result of the passage of the Pension Protection Act of 2006, and helps all airlines remain competitive," Smisek said.

In that pension bill, Congress agreed to the 8.85% rate for airlines with frozen pension plans, but made no special interest rate provision for airlines with ongoing pension plans.

Both the House and Senate had voted to give the more generous pension funding break to all airlines, but the White House objected strenuously. After months of deliberations the provision in the pension act was restricted to frozen airline pension plans.

"Now these two airlines and their allies in Congress have undermined that work," Grassley said Wednesday. "Chairman Baucus and I need to learn about the consequences of that action."

Alaska Airlines, a unit of Alaska Air Group Inc. (ALK), and some airline food service plans could also benefit from the bill - signed into law last month, though the bulk of the potential benefit would go to American, according to a source familiar with the legislation.

The Pension Benefit Guaranty Corp. has estimated that the provision could allow the affected companies to reduce their pension contributions by $2 billion over the next decade, the source said.

In letters to AMR and Continental, Baucus and Grassley ask the companies to explain how much of a funding break they could get under the new law.

Baucus and Grassley also ask whether reduced pension contributions could increase performance-based compensation at the companies.

In addition to Baucus and Grassley, several top Republicans, including Senate Minority Whip Trent Lott, R-Miss., have said they'd like to revisit the matter.

But other top Republicans and key Democratic leaders backed the latest change, and chances it will be repealed are seen as slim.

********************* *********************

The Plot Thickens!

 

[Bob Owens]

There is no reason for anyone to have to trust someones' memory with something like their pension.

The Congress passed the law preventing employees from forcing companies to provide the information about where pension funds were actually invested.

The Congress passed the law allowing companies to "book" anticipated returns as real despite the actual performance.

The Congress needs to un-"cluster" what they "clustered."

Allow employees to see the actual versus the claimed and check the books for themselves.

Well as long as most campaign money comes from corporations government will continue to make laws that favor corporations instead of employees. USA Inc.

One of the problems with these high assumptions is that when the return actually exceeds the assumption they can contribute nothing or even cash out the excess. So they get 12% one year, take out the extra 4%, then lose money the next, then they (we) are in a huge hole. Eolson cites that the average has been 10% however if thats the case then how did all these companies end up in such a mess using a lower figure? I say the lower the assumption the better.

This is a first, I actually believe that Lott has a valid point.

 

[Wild Onion]

Wait a minute: I thought that Republicans were pawns of the evil corporations and that Democrats were the savior of the "working man." I'm confused.

 

[Wretched Wrench]

Wait a minute: I thought that Republicans were pawns of the evil corporations and that Democrats were the savior of the "working man." I'm confused.

As long as most campaign money comes from corporations government will continue to make laws that favor corporations instead of employees.

Does that clear it up?

.

 

[Wild Onion]

Does that clear it up?

.

No

 

[Cosmo]

One of the problems with these high assumptions is that when the return actually exceeds the assumption they can contribute nothing or even cash out the excess.

Sorry, but the part of your comment that I highlighted in bold is incorrect. As a result of the buyout craze of the mid-to-late 1980s where leveraged buyout firms (or individuals) raided the excess funds sitting in DB plans, Congress changed the law so that once the money goes into a DB plan, it can only be used to pay pensions and plan expenses. That money cannot be withdrawn AFAIK under any circumstances.

IIRC, this was mostly the result of actions at much larger companies outside of the airline industry, but I believe that the leveraged buyouts of TWA by Icahn and Northwest by Checci/Wilson also dipped into the excess contributions of those carrier's respective DB plans.

 

[FWAAA]

One of the problems with these high assumptions is that when the return actually exceeds the assumption they can contribute nothing or even cash out the excess. So they get 12% one year, take out the extra 4%, then lose money the next, then they (we) are in a huge hole. Eolson cites that the average has been 10% however if thats the case then how did all these companies end up in such a mess using a lower figure? I say the lower the assumption the better.

This is a first, I actually believe that Lott has a valid point.

About the bolded portion: The equities markets peaked in early 2000 and then entered into a downward spiral. Then, immediately after September 11, 2001, the Fed helped the markets push interest rates down toward zero. So all of a sudden, the value of the plans sank and the interest earned on them fell off dramatically. To add insult to injury at that point, the required assumed interest rate fell as well, even though most people with a long-term horizon figured that interest rates would eventually recover. Same with the equities markets.

So how was it that other airline pension plans were billions in the hole yet AMR managed to avoid the same fate and Ch 11? In addition to the huge employee givebacks, AMR (in my view) managed its plans more conservatively, thus avoiding the huge cash call faced by US, UA and DL, all of which terminated their pilot pensions (among others). UA faced a multi-billion required contribution in 2003 which it couldn't pay. AMR, on the other hand, had much smaller required contributions and was able to pay them until the long-term pension relief was passed.

As Cosmo correctly pointed out (much like others, lke me, have said before), it's been many years since companies could legally raid the pension funds to skim off the excess. THAT's primarily why AMR is loathe to overcontribute to the plans. It can't get the money back. That's what an irrevocable trust is all about. At 12/31/06, the plans held $8.6 billion of assets, compared to $7.8 billion a year earlier. With the meteoric rise in the equites markets, I wouldn't be surprised if the plans hold $9.5 billion or more by the end of this year. Almost 60% of the assets are in equities with the remainder in long bonds and other assets (page 77 of AMR 10-K).

Lott (and the other Senators like Grassley and Baucas) make an attractive point on its face, in a very paternalistic sort of way. They're worried that AA will take advantage of these better rates and extended period to make up the shortfall and will fail at it, saddling the PBGC with an even bigger shortfall (ala USAir, UAL and DAL).

The fact is, AMR contributed more money last year to the plans than the rules required ($100 million more). Just like CO did. So what's the problem with holding AMR to a stricter interest rate and shorter make-up period since it looks like AMR doesn't need the financial flexibility of the higher assumptions and longer terms?

Simple. It's like refinancing your 30 year mortgage into a 15 year term and then having unexpected bills arise that puts you in a cash crunch. AMR wants the flexibility of the 30 year mortgage with the option (but not the mandate) to send extra.

If oil hits $80/bbl or $100/bbl next year, it would be nice to have some flexibility (under the same terms provided to NW and DL) to make up the shortfall without having to beg Congress' permission then. Sorta like why AMR has held on to extra cash for the last four years rather than emptying the cash account paying off debt - it's not always that easy to re-borrow it once you pay it off.

Boomer wants detailed info but I doubt he wants to pay for it. Besides, unless Boomer is a pilot, his pension is very unlikely to ever exceed the PBGC guaranteed amount, so shortfalls aren't gonna affect him in any event.

Still, if he wants to look, the assumed rates of return and actual rates earned can be seen in each year's 10-K.

 

[Winglet]

Wait a minute: I thought that Republicans were pawns of the evil corporations and that Democrats were the savior of the "working man." I'm confused.

No need to be confused. There ain't a lick of difference between the degree of corruption between the D's and the R's. They're all bought and paid for.

 

[xUT]

No need to be confused. There ain't a lick of difference between the degree of corruption between the D's and the R's. They're all bought and paid for.

And their retirements are secure, regardless what they inflict on us... :angry:

 

[Boomer]

AMR is committed to Chapter 11 of the Bankruptcy Code. Whatever feelings and thoughts we have previously held with respect to the manner in which AMR was being managed are now, "out the window."

AMR, through their BK lawyer, claims underfunding by some $4 Billion dollars. The, "Authority Having Jurisdiction," the Pension Guarantee Corporation, (PBGC), over these matters claims that AMR has pension obligations totalling $18.3 Billion dollars, with assets of $8.5 Billion dollars.

Despite the claims of AMR in BK Court, it is the sole provinance of the PBGC to determine the amounts paid during a distressed termination.

It seems that neither Republicrats or Demicans really cared about the true funding status relative to how AMR or the PBGC measured the money in the bank versus the promises made by AMR to their employees: current and past.

 

[usa1]

US Airways employees went through this 11 years ago. Let me warn those in their 40's, with 10-15 years of service. Your PBGC amount will be no where near enough to retire on, and you do not have enough time to make a 401K account work. Basically you are screwed.

And you better keep an eye on Paul Ryan (R) ..... because the "nation" is as broke as AMR and he wants to do the same thing to your SS and Medicare benefits that AMR is doing to your defined retirement in BK. There is a looming underfunded retirement bubble coming that will make the current housing bubble look like child's play! If the government doesn't act quickly to bring back manufacturing and domestic growth we are finished altogether. The idiots in Washington now are doing nothing?