Airlines Seek Right to Put Off Catch-Up Pension Contributions

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Airlines Seek Right to Put Off Catch-Up Pension Contributions

By Ellen E. Schultz and Theo Francis

The Wall Street Journal, May 06, 2003

The financially struggling airline industry is quietly seeking legislation that will allow commercial airlines to put off making any catch-up contributions to their underfunded pension plans for almost five years.

The industry, suffering its deepest ever recession, has repeatedly sought help from the federal government, including relief after the Sept. 11, 2001, terror attacks. More recently, Congress included in the war-spending bill passed last month aid for the industry totaling $3.8 billion in cash grants and other assistance.

At the same time, however, the airlines' attempt to seek pension-funding relief is part of a broader push toward such legislation in the U.S., with many companies seeking changes to mortality rates and requests to contribute more of their company stock, rather than cash, to their pension plans.

Advocates for employees and retirees worry that moves like these will cause pension plans to become even more underfunded, jeopardizing their retirement security. "This is just another form of bailout," says Michael Gordon, a Washington, D.C., lawyer who helped draft pension law, and now works for a retiree-advocacy group. "It's going to erode the funding status of the plans even more, and put more into a death spin."

The airline legislation, which has no identifiable author -- and as yet no named sponsors -- is intended to be attached to an existing bill, such as the tax bill, rather than to stand alone as separate legislation, said people familiar with the matter. That would enhance its chances of passage and reduce the amount of scrutiny it receives. If successful, other industries may line up for similar funding relief.

INSUFFICIENT FUNDS

Worker pension plans at major airlines are sharply underfunded. Figures in billions as of Dec. 31, 2002.

AIRLINE	PENSION LIABILITY	UNDERFUNDED AMOUNT
AMR	$8.76	$3.43
Delta	$11.68	$4.91
Continental	$2.06	$1.19
Northwest	$7.64	$3.95
UAL	$12.67	$6.38
US Airways	$5.24	$2.43

Source: Company filings

A spokesman for the Air Line Pilots Association said the measure has the support not just of the major passenger carriers, but also of the union. "It's one of those unusual situations where people who normally go at it hammer and tongs are working together," spokesman John Mazor said.

Airlines with underfunded pension plans include AMR Corp., Delta Air Lines, UAL Corp., Northwest Airlines and US Airways Group Inc.

Basically, the bill would exempt airlines from making "deficit reduction contributions," which are special accelerated payments companies must make to pension plans that are less than 90% funded on a current-liability basis. (The airlines would still have to contribute money to cover benefits earned that year by their work force, plus some interest.) The moratorium would apply for plan years beginning between Dec. 27, 2002, and Dec. 27, 2007.

In addition, the bill would allow the airlines to amortize their unfunded liabilities in equal installments over 20 years -- and put off making the first payment until late 2007 or 2008.

Starting in 2008, the airlines must begin paying down the postponed debt -- plus interest costs -- but can do so over 20 years, prolonging the underfunding. In other words, the legislation would change funding rules for airlines but wouldn't change the fact that the plans lack sufficient money to pay their future obligations.

The U.S. Treasury would benefit in the short term, because when companies don't contribute to pension plans, they don't take deductions for the money (or accumulate deductions for future use, in the case of unprofitable companies).

Companies already have various funding-relief opportunities under current law. Any company suffering "demonstrable temporary business hardship" can apply to the Treasury Department to waive funding rules for three years out of any 15 consecutive years. In addition, the labor secretary is allowed to extend by as long as 10 years the time during which any company must amortize funding contributions. Together, both measures would help a cash-strapped company pinioned between low interest rates and poor investment returns, but few companies apply for either kind of relief.

But companies don't take advantage of existing funding relief because by not funding, they are essentially borrowing from the pension plan, and the Internal Revenue Service would require collateral notes. In addition, the Treasury and Pension Benefit Guaranty Corp. could be expected to examine past funding practices; companies would rather receive blanket funding relief, no questions asked, said Michael Gordon, who represents the National Retiree Legislative Network Inc.

In a hearing Tuesday at the Labor Department, Northwest Airlines sought permission to exceed certain limits on the amount of employer securities held in pension plans. The carrier wants to use the stock of its Pinnacle Airlines subsidiary as opposed to cash to fund three Northwest defined-benefit pension plans.

Airlines aren't the only companies jockeying to tailor pension-funding relief to their own purposes. In legislation introduced last month by Reps. Rob Portman, (R., Ohio) and Ben Cardin (D., Md.), auto makers, steelmakers and other manufacturing concerns would benefit from a provision that would let them assume that blue-collar employees die younger than other people. This would enable the companies to contribute less money to their pension plans.

Also in Portman-Cardin is a provision that would allow employers to contribute less money to multiemployer plans, which generally cover union members, by stretching the impact of recent investment losses over the next three decades, instead of the usual 15 years -- similar to what the airlines are asking for.