Guaranty Corporation takes over the plan and replaces company pensions with PBGC pensions? This month’s article provides a worker’s perspective of a process most pension managers poorly understand. Terry O’Rourke, is a 22- year United Airlines employee and editor of WayPoints, a newsletter of the Aircraft Mechanics Fraternal Association, San Francisco, Local 9, whom we met in Washington during our discussions with the PBGC regarding the UAL pension plan. We look forward to the day when PBGC practices are more fully understood by the American public and subjected to the scrutiny they deserve.
Happy Holidays from Benchmark Financial Services.
Edward Siedle President
PBGC Pension Termination: A Worker’s Perspective, Two Years
By Terry O’Rourke
United Airlines (UAL) and the Pension Benefit Guaranty Corporation (PBGC) made a dirty deal to eliminate our
company pensions and replace them with anemic PBGC pensions. The co-conspirators agreed to a pension
termination that served them well but dealt a devastating blow to UAL employees. We learned about the self-serving
deal from an April 22, 2005 press release issued by the PBGC and the media coverage the press release generated.
The agreement would be confirmed by the bankruptcy court less than one month later, on May 10, 2005.
The PBGC/UAL pension termination agreement provides a clear example of the corporate-run government’s attack on workers taking place in this country. The PBGC minimized the damage to its coffers by trading its rights for UAL’s money at the expense of the very constituents it claims to serve.
The agency, led by Bush appointees, sided with corporate interests over working people. UAL cut $10 billion of debt
off its balance sheet for pennies on the dollar. The courts then completely cooperated, awarding UAL the necessary
rulings in bankruptcy and denying all worker legal attempts to mitigate its damages. What options are left to workers?
As a UAL employee and an editor of a mechanics’ union publication (Aircraft Mechanics Fraternal Association Local
9 WayPoints, online at www.amfa9.org/waypoints), I followed and wrote about this story as it happened. This article
looks at a pension termination from ground level, from a worker’s point of view, and draws some lessons that we’ve
learned from our experiences.
PBGC Press Release
According to the press release, the PBGC only guaranteed $6.6 billion of UAL’s $9.8 billion pension underfunding
from its four terminated plans. UAL pension beneficiaries made up the difference as they absorbed a $3.2 billion
reduction in their benefits.
The deal, however, softened the PBGC’s blow as the agency received $1.5 billion in new UAL equity making it UAL’s
largest stockholder. In return, the PBGC granted UAL some significant “benefits.” Employees and retirees in effect
funded this gift to UAL with cuts in pension benefits.
Even though the pilots’ and ground employees’ pension plans had already been terminated by the PBGC, the PBGC press release gave enough details to suggest that extensive behind-the-scenes bargaining took place regarding the
ultimate terms of the pension terminations. The employees played no role in the PBGC/UAL agreement that over time
cost pension beneficiaries dearly.
For example, in exchange for that pile of stock, the PBGC agreed to waive its right to “restore” or return the
pensions to United if the PBGC later decided that the company could afford them. Airline industry analysts now
speculate that United’s frequent flyer program, Mileage Plus, is worth $15 billion. United now wants to sell it and
use the money to fund its “core” business. The company claims this asset was worthless during its “strategic” trip
through bankruptcy. UAL exited bankruptcy less than two years ago. If the PBGC had not waived its restoration right
it could have required the company to resume sponsorship of the terminated plans.
While pension beneficiaries can feel helpless in the termination process today, prior to 1974 the situation was
worse. When companies went out of business, employees lost all their benefits, including retirement. The PBGC was set up as a result of the 1974 Employee Retirement Income Security Act (ERISA). The agency is funded by employers
that sponsor defined benefit (DB) pension plans via an annual per employee premium and also by assets taken over
from terminated plans. No taxpayer dollars fund the PBGC, and it cannot call on the US Treasury if financial solvency
Meanwhile, the drastic decline of DB plan participants resulted in a fall off in PBGC funding. The Private Pension
Plan Bulletin Historical Tables published by the US Department of Labor in March, 2007, documents that trend in
the twenty year period (1975- 2004) that followed the establishment of the PBGC. During that time, the number of
active participants in DB plans fell from 27.2 million to 20.6 million, a decline of over 24%.
By contrast, the number of active participants in defined contribution (DC) plans (conceived to “supplement” other
pensions) mushroomed from 11.2 million to 52.2 million. Establishment of DC plans (such as 401ks) enabled employers to eliminate or sharply curtail their existing DB plans.
The PBGC’s September 30, 2007 financial statement reported that the combined position of the agency’s single-employer and multi-employer programs is $18.88 billion short of satisfying all its long-term obligations, an improvement of $4.2 billion over the 2005 position. The report states, “The Corporation has sufficient liquidity to meet its obligations for a number of years; however, neither program at present has the resources to fully satisfy the PBGC’s long- term obligations to plan participants.”
The PBGC currently insures pensions for about 44 million American workers and retirees that participate in 30,460
private-sector defined benefit pension plans. While the PBGC cannot access the US Treasury, some observers
speculate that Congress would respond favorably to this sizeable constituency if the agency suffered a liquidity
crisis. This is a gamble to put it mildly!
Benefit Multiplier System
To appreciate how the UAL pension termination hurt workers, it’s necessary to understand how benefits were calculated as well as the larger context of labor bargaining in the airline industry.
As a mechanic, I participated in the UAL Ground Employees’ Pension Plan. It used a simple “benefit multiplier” system
to calculate a monthly pension amount. The monthly benefit was the product of the multiplier and the employee’s years of plan participation. An early retirement factor reduced the multiplier if an employee retired before age 60.
Distribution options that provided surviving spouse benefits also reduced the monthly amount.
In the airline industry the Railway Labor Act (RLA) governs union contracts. Airline labor contracts never expire, they
only become amendable. July of 2000 marked the contract amendable date that the ground employees of UAL anxiously awaited. Their wages and benefits had been held below market levels by an Employee Stock Ownership Plan (ESOP) contract narrowly approved in 1994.
United Airlines used the full process of the RLA to delay a new contract until early in 2002. It took a Presidential
Emergency Board to finally break the negotiation impasse. In addition to getting relief from the stagnant wages
imposed by the ESOP, the March 14, 2002 agreement boosted the full pension multiplier to $87 for mechanics. The
previous multiplier of $60.04 had been in place since 1998. The new agreement also lowered the unreduced multiplier age from 62 to 60.
UAL Files Chapter 11
UAL filed for Chapter 11 bankruptcy protection on December 9, 2002. Using the bankruptcy law to threaten rejection of
its labor contracts, United forced the unions in 2003 to accept large cuts in wages and benefits. They didn’t ask
for pension cuts or termination during that first round of concessions.
A second round of bankruptcy cuts to labor contracts in December, 2004 culminated in further reductions of employee
pay and benefits. The company announced to its employees during this time that it could not afford to continue its
Defined benefit pension plans may be terminated by either the employer or the PBGC. If the employer has enough assets to pay out all obligations of a pension plan, then it can initiate a standard termination. If the employer doesn’t
have enough assets to meet its pension liabilities, then with the approval of either the bankruptcy court or the
PBGC, the employer may end its pension in a distress termination.
The PBGC can also terminate a pension if it determines that doing so will protect the interest of the plan participants
or the PBGC insurance program. This involuntary termination happened to two of UAL’s plans: the pilots and the ground employees. The pilots’ plan was terminated on December 30, 2004 and the ground employees’ plan on March 11, 2005.
Why did the PBGC move on those dates? It did so to prevent pension improvements from taking effect and increasing the PBGC liability. The PBGC concisely sums up determination of guaranteed benefits: Benefits are based on the provisions of the plan, “subject to the limits set by law.”
One of these limits is referred to as the “phase-in” limit. It says that the PBGC will not fully pay any pension plan
improvements that are less than five years old. Instead, improvements are guaranteed incrementally at the rate of
20% per full year. That is, only those improvements that have been in effect for a full five years will be fully
“phased in” to the PBGC benefit calculation.
The ground employees’ plan multiplier increased from $60.04 to $87.00 on March 14, 2002, an increase of $26.96. Before March 14, 2005 the guaranteed multiplier for mechanics had only accrued a 40% guarantee of the last increase and then stood at $70.82.
On March 14 the guaranteed multiplier was scheduled to increase to $76.22. When the PBGC terminated the plan on
March 11, 2005, the move saved the PBGC millions in liability but collectively cost ground employee pension
participants that same amount.
A mechanic with 25 years of service stood to gain $135 per month if the PBGC termination occurred three days later. In the deal announced between the PBGC and UAL, United agreed that the March 11 date would stand.
Courts Rule Against Workers
The union representing the mechanics, the Aircraft Mechanics Fraternal Association (AMFA), argued at the May
10, 2005 bankruptcy hearing that UAL and the PBGC made an agreement that offered “consideration” or money out of the pockets of a third party. The bankruptcy judge didn’t buy that argument and decided that AMFA could take its case to district court if it wanted.
AMFA argued in a Virginia District Court to delay the termination date by one week. This would have allowed another 20% phase-in of the 2002 pension increase.
It cited as precedent a Pan Am case that did just that under similar circumstances. AMFA lost the District Court
case in November, 2005 and then appealed to the Fourth Circuit Court of Appeals. The appellate court, in January
2007, affirmed the lower court ruling. AMFA did not appeal to the Supreme Court after the Court refused to take a UAL
pilot case with similar issues.
Long Service Hit Hardest
What did the PBGC termination cost United Airlines’ ground employees? In addition to the phase-in limits, many
employees also suffered hefty cuts due to the PBGC’s maximum annual limits. These limits, dependant on a workers
age at the start of benefits, punished long-term employees and retirees. Early retirees suffered the largest
Many employees dedicated long careers to United Airlines. A 25-year career was common and 30, 35 and 40 year careers were not unusual. Unfortunately for these employees, the maximum annual PBGC limits decimated their pensions. Especially hard hit were long-service early retirees that retired between 2000 and 2005.
Maximum Llimit Details
In 2005 the PBGC allowed a maximum annual benefit of $44,614 – a seemingly generous number that misled many a
business-page writer and reader to conclude that the pension cuts were not so bad. The maximum amount is
increased each year.
The $44,614 amount was the maximum for a 65-year old. This fact hit pilots very hard since the FAA requires them to
retire at age 60. The PBGC ceiling at age 60 is only 65% of the age 65 amount or $28,999 annually for pensions
terminated in 2005. That ceiling steps down in 7% steps for every year from ages 65 to 60.
The age 55 ceiling is only 45% of the age 65 amount. The age 55 annual maximum for 2005 is $20,076. The maximum
limits step down in 4% steps from ages 60 to 55.
This system hits long service early retirees the hardest. Consider one of the worst-case scenarios, a mechanic that
retired in 2003 at age 55 with 30 years of service. His/her annual benefit before the PBGC pension termination was
$26,622. The PBGC limits sliced this pension and left the retiree with just $18,235-a 32% reduction! On top of that,
the retiree also got hit with big increases in health insurance costs due to other bankruptcy cuts.
PBGC Benefit Erodes
The PBGC pension termination affects workers in other, less obvious ways. While the UAL pensions for the ground
employee group never protected retiree benefits with a “cost of living adjuster” or COLA, at least the periodic
renewal of contracts protected the value of the pension during an employee’s active work career.
This periodic increase in the multiplier as contracts renewed applied to every year of pension-credited service,
all the way back to the first year. This had the effect of providing some inflation protection to active employees and
kept their pensions “fresh” until they started to take their benefit.
The PBGC pension amounts are locked-in to a fixed dollar amount. With the passage of every year the value of that
benefit falls by the rate of inflation. Younger workers especially see their PBGC pension in a vanishing light. I
have heard them remark, “By the time I retire in 2027, I’ll be lucky if I can buy a nice dinner with my pension!”
Rule costs workers, not companies If that’s not bad enough, the system heaps further abuse onto PBGC pension
“beneficiaries.” The PBGC set up rules to discourage companies from gaming the system by dumping unfunded
pension liabilities onto the PBGC, and then turning right around and starting a replacement pension plan of
equivalent value. The rules allow the PBGC to “restore” or return a pension to a company that it deems guilty of
“follow- on” pension abuse.
Union actuaries determined that the old UAL ground plan, if properly funded, would require company contributions
equivalent to about 12% of wages. Post- pension termination UAL refused to contribute more than 5%, on average, into a ground employee’s 401 (k) DC account.
This DC account replaces the terminated DB account. When the union pressed for greater contributions by the
employer, United countered that it could not contribute any more or it risked “restoration” by the PBGC. (While the
PBGC did waive its restoration rights in its deal with UAL, it apparently still had some influence with regard to
follow-on pension levels.) This depressed contribution period will persist for five years. The PBGC policy serves
companies like UAL quite well. Meanwhile pension beneficiaries pay the price.
Fundamental Change Needed
About the only good thing that can be said about the PBGC is that the guaranteed pensions that they provide are
better than nothing. Prior to 1974, when a company went bankrupt and liquidated, longtime employees lost their job,
wages, health insurance, and their entire pension.
Employees can take some comfort that pension protection used to be worse. We object strongly, however, to the
corporate use of bankruptcy in recent years to dump pension liabilities and then reward corporate executives with fat
Why not force bankrupt companies to place pensions at the head of the bankruptcy line of claimants? Pensions are
nothing more than delayed wages which should receive a higher claim in bankruptcy. Protection of hard-earned
pensions is essential for the survival of the middle class and all working people. This is all the more important in
light of ongoing attempts to eliminate or sharply reduce the benefits of Social Security. Until the current system
of corporate-friendly bankruptcy rules is changed, companies will continue to game the system and renege on
their pension responsibilities.
Terry O’Rourke is a 22-year United Airlines employee and editor of WayPoints, Aircraft Mechanics Fraternal
Association, San Francisco, Local 9.