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Documents Disclose Wider Pension Deficit

By MARY WILLIAMS WALSH, New York Times

July 15, 2003

United Airlines' pension difficulties may be significantly greater than the airline has disclosed to its investors and employees, according to documents filed in federal bankruptcy court.

The documents show that the total deficit of United's four main domestic pension plans is $7.5 billion — at least $1 billion more than the deficit disclosed in a footnote in the company's annual report. There, the airline reported a total pension deficit of just $6.3 billion.

The larger figure represents how much of a shortfall United would have if it terminated its major pension plans on April 15 and tried to use the assets of each plan to cover the benefits already earned by its workers. The figure in the annual report, calculated in a different way, is intended to show investors the total claims that United's pension funds have on its operations.

The figures derived from the court documents — called "termination" pension deficits — are not normally disclosed to investors, the general public or workers. They became available only because United was in bankruptcy. The federal government, which insures pension plans, included the additional information when it asserted its claims as a creditor in May.

Last week, the Bush administration proposed that every company with a traditional pension plan make termination data available once a year. The proposal is scheduled to be the subject of a Congressional hearing today, along with related administration proposals to tighten pension financing rules and revise calculation methods.

A United spokesman said that the differences in the annual report and the government court filings merely reflected different measuring techniques and not a sharp deterioration in the airline's pension plans. He declined to comment further.

In the past, companies have successfully fought to keep the additional information secret, saying termination data was irrelevant because they did not plan to terminate their pension plans.

Companies have also protested that the pension data could confuse and needlessly frighten workers and retirees. They even persuaded Congress to make the termination pension information exempt from the Freedom of Information Act in 1994. Though some additional data is kept by the Labor Department and is available to the public, it is usually at least two years old, and can suggest that plans are in good shape when they are not.

Pension advocates say that if the termination financing level of each pension plan were reported yearly, then employees, retirees and others would be able to gauge the health of their pension plans and press for additional financing if the plans seemed shaky.

Employees and retirees would also be able to use the data to figure out whether they risked losing benefits if their plans were to fail. The federal government insures pensions, but its coverage is limited, and a plan's termination financing level is a key factor in whether a company's retirees are fully covered or not. The greater the deficit at termination, the greater the likelihood that some employees will lose benefits.

When the pilots' pension plan at US Airways was terminated in March, for example, it was only about 33 percent financed on a termination basis, with a deficit of about $2.5 billion. But the pilots had no way of knowing this and did not call for larger contributions or a more conservative investment strategy until it was too late. Many of them lost substantial benefits.

"While certain parts of the Bush pension proposal may be problematic for airlines, the one bright spot is the initiative to provide fuller disclosure," said John Mazor, a spokesman for the airline pilots association, which represents most of the nation's airline pilots.

Of the pension plans at United, the pilots' plan has the largest deficit, about $2.5 billion, according to the bankruptcy court documents. The deficit is the largest because the pilots' plan has offered the richest benefits at United, as pilots' plans do at other major airlines. The plan covered about 14,000 pilots, retired pilots and pilots' widows at the end of 2000.

United's ground employees — roughly 38,000 workers, retirees and spouses — face a pension shortfall of $1.9 billion, according to the bankruptcy court filings. The managerial and administrative workers' plan had a shortfall of about $1.7 billion in April, and about 42,000 participants at the end of 2000.

The flight attendants' pension plan had a deficit of about $1.4 billion, according to the court filing. That plan had about 27,000 participants at the end of 2000.

The accounting rules used to calculate the pension information in United's annual report require all companies to combine their various employees' pension plans into a single set of aggregate numbers, making it impossible to track individual plans.

These rules also ask accountants to "smooth" pension values from one year to the next. The rules, issued in 1985, have drawn criticism in recent years, as the financial condition of many pension plans has deteriorated.

Investors and employees rely on the information because it is usually the most recent available — but it also obscures the true state of individual pension plans at a given moment. The rules were written that way intentionally, in the belief that pensions are long-term obligations and their short-term fluctuations should not be allowed to creep into corporate financial reports.