(January 16, 2012)—Pension Benefit Guarantee Corporation (PBGC) director Josh Gotbaum has informed American Airlines that it should preserve its pension plans regardless of its current standing within Chapter 11 bankruptcy.
In a statement released late last week, Gotbaum said: “American has more than $4 billion in cash; some of that money should already have been paid into its pension plans. However, Congress, hoping to preserve plans, allowed American to defer the payments. It would be a tragedy if American repaid Congress’s generosity by turning around and killing the plans anyway.”
Recent statements by American Airlines’ lawyers suggest that the company is hoping to divest itself of its pension plans by passing them off onto the PBGC’s balance sheet.
Gotbaum’s statement was referring to a law passed in 2007 that allowed airlines to use a higher discount rate—8.25%, similar to public pension plan rates and significantly higher than the average corporate pension plan—in order to lower its projected benefit liabilities. This meant that American and other airlines had to contribute less to its pension plan at the time, and was seen by many as at odds with the intent of the Pension Protection Act of 2006, which was partially intended to force a lower assumed rate of return for plans.
According to PBGC calculations, the American Airlines’ combined plans currently have a 45% funding rate—a number considered extremely weak by most pension experts. The agency calculates that the plans have $8.3 billion in assets to cover $18.5 billion in benefit obligations. The airline, on the other hand, say the funding ratio is nearer to 80%, a difference that results, at least in part, from the discount rate used to calculate obligations.
Previously, Gotbaum has suggested that any jettisoning of American’s plans would result in lowered benefits for employees. When news first emerged of the airline’s bankruptcy, he said: “Unfortunately, when the agency assumed airline plans in the past, many people’s pensions were cut, in some cases dramatically. That’s why PBGC always tries first to preserve plans, even after companies enter bankruptcy. As we did with Visteon, and with some plans at Delta and Northwest Airlines, we will encourage American to fix its financial problems and still keep its pension plans.”