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.
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.
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
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
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.