Pension defaults could spread
Airlines pile on pension obligations, autos may be next
By Stephanie I. Cohen, MarketWatch
May 11, 2005 

WASHINGTON - As the U.S. airline industry defaults on billions of dollars in pension obligations, the federal agency charged with guaranteeing the retirement funds of millions of U.S. workers is growing closer to facing its own financial crunch.

  While the federal government has stepped in to help major domestic airlines deal with dramatically underfunded pension liabilities, it may find itself financially unable to aid other struggling sectors, such as the U.S. auto industry, seeking to relieve themselves of similar burdens.
  A federal judge ruled Tuesday in Chicago that United Airlines can walk away from $6.6 billion worth of unfunded retirement obligations to 119,000 current and former union employees, the largest pension default in U.S. history. See full story.
  "Termination and replacement of the pension plans is something we tried very hard to avoid, but it simply proved unavoidable," said Jake Brace, chief financial officer of UAL Corp. (UALAQ: news, chart, profile) , the parent of United Airlines, after the company posted a wider net loss for the first quarter of the year of $1.1 billion on Wednesday. See full story.
  The Pension Benefits Guarantee Corp., the government agency created in 1975 to bail out domestic companies that default on pension obligations, will pick up the tab for United Airlines' pension plans. The PBGC is funded through an employer premium, essentially a tax on employers that fund defined-pension benefit plans. Read more about PBGC.
  PBGC maintains that U.S. pension plans are underfunded by more than $450 billion, with companies in financial trouble liable for nearly $100 billion of this amount. The $100 billion estimate, however, does not assume defaults by U.S. auto makers.
Bailouts mounting
  The PBGC in February assumed responsibility for $3 billion of U.S. Air's (UAIRQ: news, chart, profile) pension obligations. U.S. Air entered bankruptcy for the second time in 2004.
  Atlanta-based Delta Air Lines Inc. (DAL: news, chart, profile) also warned the market this week that it may face substantial losses in 2005, triggering concerns of another bankruptcy filing in the airline industry. See full story.
  Some analysts have warned that the big auto makers' ability to halt sliding market share in North America amid mounting competition from Japanese auto makers could pose the next major bankruptcy crisis.
  U.S. pension obligations for General Motors Corp.'s (GM: news, chart, profile) at the end of 2004 were $89 billion.
U.S. pension obligations at Ford Motor Co. (F: news, chart, profile) totaled $43 billion at year-end 2004. Of that, $12.3 billion is unfunded, according to the rating agency Standard & Poor's.
  There is also speculation that Delphi Corp. (DPH: news, chart, profile) , a former subsidiary of General Motors that makes automotive parts, may file for Chapter 11 and could seek to dump its pension liabilities. This could cause a ripple effect in which other auto-parts makers would likely file for bankruptcy to remain competitive, according to a UBS research report. The PBGC estimates Delphi's unfunded pension liability at about $5.1 billion.

System meltdown
  The head of the federal benefit system, Bradley Belt, told lawmakers in late April that the PBGC is "under severe stress" following the bankruptcies in the U.S. steel and airline industries, which have led to a record long-term deficit of $23.3 billion at the PBGC.
  Although the number of traditional pension plans paid by employers has fallen over the past two decades, the costs of these plans have grown as companies with aging workforces and rising medical expenses have set aside insufficient assets to pay for the promised benefits.
  The PBGC collects roughly $600 million a year from the private sector, far short of the amount needed to pay the pensions of companies that have fallen on hard times.
  The move by the PBGC to cover United Airlines' pension plans will result in a 40% cut in benefits to these retirees. The PBGC caps annual payouts at $45,600 a year.
  The Bush administration has proposed dramatic changes in how the PBGC is funded that have received a lukewarm reception among lawmakers.
  Currently companies that offer traditional private pension plans pay a flat-rate of $19 per person annually into the PBGC fund, a rate that has not been increased since 1991. The administration would increase this fee to $30 to generate as much as $400 million extra a year in funding and index the rate to growth in workers' wages.