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United's Pension Decision `Illegal' Agency Demands Explanation from Troubled Airline
By Melissa Allison and Stephen Franklin, The Chicago Tribune
July 27, 2004
United Airlines broke the law by promising lenders that it would stop making payments to its pension plans, federal regulators said Monday.
In a strongly worded letter to United Chief Executive Glenn Tilton, the Pension Benefit Guarantee Corp. said the airline's plans were of "great concern" and "inconsistent" with pension and tax laws.
The agency, which would be on the hook if United dumped its pension plans entirely, demanded a detailed explanation from Elk Grove Township-based carrier at a meeting on Thursday.
The pension board wants United to continue funding the plans, saying the airline needs to know that "it's illegal to simply stop making contributions," said Randy Clerihue, a spokesman for the agency.
"It is definitely rare for a company in bankruptcy that stops making payments to later right the pension ship," Clerihue said.
United's pension plans are underfunded by at least $7.5 billion, the government says, and on Friday the carrier said it would stop making payments while in bankruptcy. The airline's deal with its lenders for $1 billion in bankruptcy loans prevents it from making the pension payments, United said.
Indeed, United has acknowledged that it is considering pension cuts to attract additional outside investment it needs to emerge from bankruptcy.
The pension board, however, said although it doesn't like where United appears to be headed with its pensions, it needs more information about the carrier's plans.
"What we have here is a case where not enough was said by the company," Clerihue said.
The International Association of Machinists and Aerospace Workers welcomed the pension agency's scrutiny.
"The company should be ashamed that the PBGC has shown more concern for United's active and retired employees than the carrier has," said union spokesman Joseph Tiberi.
The letter sent Monday from pension board Executive Director Bradley Belt to Tilton said that stopping pension contributions is a "serious matter."
"The PBGC would like specific information regarding how [United parent] UAL intends to close the growing funding gap in these plans," Belt wrote.
And if United intends to terminate any of its pension plans, the board and workers "should be made aware of that fact as soon as possible," he cautioned.
United spokeswoman Jean Medina said the company received the letter and plans to meet with the agency to "discuss the issues directly."
The pension board has said it estimated last year that it could fund about $5 billion of the $7.5 billion shortfall in United's pension plans. It would be the largest pension failure in the agency's history.
Zvi Bodie, a professor of finance at Boston University, said the pension board finds itself in an unusual position with United.
"It's got the PBGC pretty upset, because it's going to be a big liability falling right in their lap. They would like to avert it if they can," Bodie said.
Gary Ford, a former general counsel for the agency, said the warning letter to United is not its usual business practice.
"They have certainly done it before, but it is not a routine action," Ford said.
If United abandons its pension plans, how much money is on hand will become a critical issue, experts say.
That is because the agency will try to spend as much of the money as possible on people who have retired within the last three years or were eligible to do so, experts said.
The rationale for this, they said, is that these workers are less likely to be able to make up for the losses in their pension benefits.
As low interest rates and a troubled stock market have pummeled corporate pension plans in the last few years, the pension board has grown increasingly concerned about its long-term financial health.
In June the agency said that the total shortfall for companies with underfunded plans came to $287.6 billion. That number was down from a $305 billion total a year earlier, but it was a marked increase from 1999, when the total shortfall was $18.4 billion.
Since its birth 30 years ago as protection for workers suddenly faced with collapsed pension plans, more than two-thirds of the agency's applications from troubled companies have come from the airline and steel industries.
Besides coming to the rescue of pension plans for Eastern, Pan American, TWA and other airlines, the agency recently was called upon to support the pension plan for US Airways pilots.
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