PBGC: American Airlines Has Failed to Prove Reasons for Pension Termination

As American Airlines announces plans to drop its defined benefit pension plans, the Pension Benefit Guaranty Corporation (PBGC) warns of the implications.

(February 1, 2012) — AMR Corp’s American Airlines wants to kill pensions for 130,000 employees, but the Pension Benefit Guaranty Corporation (PBGC) asks: is that really necessary?

In a statement released today, PBGC Director Josh Gotbaum said: “Before American takes such a drastic action as killing the pension plans of 130,000 employees and retirees, it needs to show there is no better alternative. Thus far, they have failed to provide even the most basic information to decide that.”

American Airlines — which reportedly received $1 billion in pension relief since 2008 and has $4 billion in cash — has revealed plans to terminate its four pension funds, which are underfunded by about $10 billion, and begin offering 401(k) plans to employees, according to a statement released today on its website. The airline’s proposed termination of its pensions would be the largest in history, the PBGC has asserted, reiterating that pension termination should only be a last resort and not part of a business strategy to take advantage of the bankruptcy process, leaving taxpayers with the burden. Under federal law, if a company in bankruptcy plans to end its pensions, it must demonstrate that doing so is the only way it can reorganize.

The airline explained that it will seek Bankruptcy Court approval to terminate its defined benefit pension plans. “If the plans are terminated, American will contribute matching payments in a 401(k) plan,” the statement said. “American also will seek to discontinue subsidizing future retiree medical coverage for current employees, but will offer access to these plans if employees choose to pay for them. American also proposes to implement common medical plans and contribution structures across all active employee groups.”

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Tom Horton, AMR Chairman and Chief Executive Officer, said: “These are painful decisions, but they are essential to American’s future. We will emerge from our restructuring process as a leaner organization with fewer people, but we will also preserve tens of thousands of jobs that would have been lost if we had not embarked on this path – and that’s a goal worth fighting for. By reinvesting savings back into our business, we will support job growth, including growth at our suppliers and partners over the long run. Only a successful, profitable and growing American Airlines can provide stability and opportunity for our people.”

Last week, PBGC claimed that American Airlines employees should worry about pensions as the airline struggles to pull itself out of bankruptcy. American Airlines’ recent statements, through its lead bankruptcy counsel and in employee communications, have signaled the airline’s intent to dump its retirement obligations on the PBGC, said J. Jioni Palmer, director of communications of the federal agency, in a statement. He continued: “American Airlines is telling their workers and retirees not to worry, but they should. American said nothing’s been decided yet, but didn’t even bother to pretend that it was trying to preserve its employees’ pensions.”

According to the federal agency, American Airlines’ management have been downplaying the serious consequences of what could happen if the company terminated its pension plans. “The letter ignored that PBGC doesn’t insure retiree health benefits, which are usually canceled when companies terminate pension plans,” the statement by the PBGC said.

Since American Airlines sought Chapter 11 protection on November 29, PBGC has been working to try to preserve the airlines’ pension plans. While the PBGC has repeatedly stated that the airline must be preserved, it has said that doing so while preserving its plans would be in the best interest of both the airline and the PBGC, which has been hit with burgeoning debts as corporate bankruptcies and pension failures have contributed to its widening deficit. Furthermore, PBGC noted that other airlines had reorganized successfully without terminating their plans.

(February 1, 2012) — Institutional investment plan sponsors in the Northern Trust Universe gained 4.5% at the median in the fourth quarter of 2011 and a median return of 0.8% for the year.

According to the third-largest independent US custody bank, a surge in US equities created a positive ending to a mixed year for most plans. “Global market volatility contributed to an up-and-down year for institutional plan sponsors in 2011, with two quarters of moderate gains followed by a nearly 10 percent drop in the third quarter and a sharp recovery at year-end,” said William Frieske, senior performance consultant, Northern Trust Investment Risk & Analytical Services, in a statement. “Last quarter’s positive results were in line with historical trends in the Northern Trust Universe, with fourth quarter median returns typically being the highest in the calendar year.”

While institutional investors in the Northern Trust universe achieved a median return of just under 1% for the year, the results differed by segment. Corporate ERISA Pension Plans gained 2.3% at the median while the median Public Fund was up by 0.9% and the median fund in the Foundations & Endowments segment was down by 0.6% for the 12 months ending December 31, 2011.

In terms of asset allocation, Northern Trust’s research showed that corporate pension plans had the largest allocation (nearly 35% at the median) to fixed-income in the third quarter, along with the largest allocation to US equity (nearly 37% at the median). Public Funds performance suffered from a larger allocation to International Equities (16%) while Foundations & Endowments’ larger allocation to hedge funds (7%) hurt performance.

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The Northern Trust Universe represents the performance of about 300 large institutional investment plans in the US, with a combined asset value of approximately $689 billion, which subscribe to Northern Trust performance measurement services.

Last year, Northern Trust found that strong equity performance coupled with the success of active managers contributed to its success. “What we’ve seen in our universe is that a lot of our plan sponsors have been overweight in small to mid-cap stocks, which have done particularly well,” Frieske told aiCIO in April of last year. “The strong performance of active managers has helped that gain,” he added.

According to Frieske, the superior performance of active over passive managers contrasts with assertions by prominent figures in the investment industry, such as Vanguard. “We’ve proven period over period that active managers are a good idea, as our universe has demonstrated that the median manager — the guy in the middle of the pack — is better than the index,” he said.

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