The government's pension insurer said yesterday that it wants the authority to place liens on the assets of companies in bankruptcy such as US Airways when those companies do not make required payments to their pension plans.
US Airways told a bankruptcy court in Alexandria on Monday that it doesn't plan to make a $110 million payment due today to pension plans covering its mechanics and flight attendants. The airline said its pension obligations total $531 million over the next five years.
Live, Wednesday - 11 a.m. ET: Ben Baldanza, senior vice president of marketing at US Airways, discusses the second instance of US Airways filing for bankruptcy protection with Post columnist Keith Alexander.
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In July, United Airlines refused to make a $72.4 million payment to four of its pension plans, and said it would not make $500 million in payments due this year.
The government agency, the Pension Benefit Guaranty Corp., argues that the failure to make required payments is illegal but that it lacks power to do anything about it under bankruptcy law. Yesterday it said it should have authority to place liens against the corporate assets of a bankrupt company so that the amount of the missed payment can be preserved for the pension plan participants. It already has such power over companies not in bankruptcy.
Such authority would require a change in the law.
"Failure to act will increase the risk that participants will lose promised benefits and that the pension insurance program will suffer larger losses. We need to make clear that pension contributions are required whether a company is in bankruptcy or not," Executive Director Bradley D. Belt said in a written statement yesterday.
The agency also wants companies to be required to notify pension plan participants within 30 days of a bankruptcy filing of the plan's funded status and of legal limits on the agency's guarantees, which in some cases are substantially less that the pension promised to an employee under the plan.
A federal judge in New York ruled in 1991 that the PBGC has no priority over other creditors in bankruptcy and that the PBGC cannot compel bankrupt companies to make payments required by pension law. PBGC officials said at the time that the ruling created a dangerous situation for the agency. Legislation was introduced to overturn that ruling but never passed.
United has said it expects to terminate its pension plans, but has not yet done so. US Airways has said it is negotiating with its unions to "modify and replace" its plans, but if it cannot reach agreement it will seek authority to abrogate its labor contracts to make the changes it wants.
The airline told the court it thinks it "would not be able to meet [its] obligations under the pension plans and survive."
The airline left open the possibility that it could "freeze" its pension, meaning benefits would cease to accumulate and no new employees would be covered. But the PBGC pointed to part of the airline's bankruptcy court filing that termed it "irrational" to make pension contributions because it "provides no benefit to the [bankruptcy] estate."
"That is a remarkable statement," Belt said. "The company is saying it's irrational to keep your pension promises and to comply with federal pension law. Bankruptcy should not be the path of least resistance to deal with your pension obligations."
Under the law, an employer cannot unilaterally terminate an underfunded pension plan. To do so and shift the liabilities to the PBGC, a company such as US Airways must convince a bankruptcy court that it cannot survive or emerge from bankruptcy without shedding those liabilities. After emerging from bankruptcy the company can start a new plan, typically a 401(k) plan, which is less costly and more predictable for employers than a traditional pension.
Traditional pensions, known as defined-benefit plans, promise a pension amount based on a formula, typically involving pay and years of service with the company. Plans such as 401(k)s, known as defined-contribution plans, are investment accounts funded by contributions from the employee and/or the employer, and the benefit is whatever amount is in the account at retirement.
Defined-benefit plans are insured by the PBGC. Defined-contribution plans are not.