United Continental Begins Hefty Payback to PBGC

United Continental Holdings Inc., the parent of United Airlines, is set to begin making its first payment to the PBGC, repaying up to $500 million in eight equal installments of $62.5 million.

(July 15, 2011) — United Continental Holdings Inc., the parent of United Airlines, will begin making payments on a $500 million bill to the Pension Benefit Guaranty Corporation (PBGC).

The deal stems from when United Airlines was in Chapter 11 bankruptcy protection. The airline ended its pensions in 2005, and handed the responsibility over to the PBGC. When the pension agency took over United’s four pension plans, guaranteeing a total of $6.6 billion, the plans were underfunded by $9.8 billion.

The note — which came as a result of the company reaching a $3.5 billion profitability threshold — carries an 8% annual interest payment to PBGC and will mature in June 20, 2026.

The federal agency, which assumes the pension liabilities of companies in bankruptcy, has been pummeled in recent years by the economic downturn, which has caused a rising number of corporate bankruptcies and pension failures. In November 2010, the PBGC revealed that its total deficit had increased 4.5% to $23 billion in the year to September 30, up from $22 billion the previous year.

For more stories like this, sign up for the CIO Alert newsletter. 

“This financial position is the result of inadequate plan funding and misfortunes that have befallen plan sponsors. In part, it is a result of the fact that the premiums PBGC charges are insufficient to pay for all the benefits that PBGC insures, and other factors,” the government’s pension insurer said last year. The PBGC said at the time that its total obligations increased by $11.5 billion to $102.5 billion, yet it had $79.5 billion in assets to pay those obligations. “The deficit — the difference between our assets and liabilities — is not an immediate cash crunch, since we have the assets to pay for the foreseeable future,” PBGC spokesman Jeffrey Speicher told aiCIO.

To contact the <em>aiCIO</em> editor of this story: Paula Vasan at <a href='mailto:pvasan@assetinternational.com'>pvasan@assetinternational.com</a>; 646-308-2742

According to Deputy Mayor Robert Steel, New York City should put more cash into international equities and fixed income, inflation-protected bonds, commodities, currencies, and real estate to improve returns.

(July 15, 2011) — New York City has been pushed to tweak its investing mix to reduce the size of its pension hole.

According to Deputy Mayor Robert Steel, New York City’s pensions are overweighted in US stocks and bonds and should invest more heavily in other assets, such as US Treasuries, Reuters has reported.

Specifically, Steel asserted that in order to afford more than $80 billion of contributions over the next decade, the city should allot more cash to international equities and fixed income, inflation-protected bonds, commodities, currencies, and real estate to boost returns.

Steel’s comments indicate his dissatisfaction with Comptroller John Liu’s oversight of the city pension funds. In a speech before the Citizens Budget Commission (CBC), he challenged Liu’s recent assertions that the city’s five funds had achieved a 20% return over the last fiscal year. “In fact, over this same period, when we earned 20%, the S&P was up over 30%,” Steel said, according to the New York Post. “So while 20% is an attractive number, when you compare it to what we should or would want to be achieving, it certainly seems to be a little bit light.”

Never miss a story — sign up for CIO newsletters to stay up-to-date on the latest institutional investment industry news. 

“Pensions are to the City of New York what entitlement reform is to the federal government,” Steel noted. “These are difficult, hard issues that require political risks to be taken to make the hard choices that we need.”

New York City Mayor Michael Bloomberg has also criticized the Comptroller’s oversight of the city’s schemes. A recent study commissioned by Liu predicted that the city’s pension costs will spike in 2016 at roughly $8.3 billion, before heading into a gradual decline, yet the Mayor indicated major flaws in the report. The report by Liu, a potential 2013 mayoral candidate, contrasted with Bloomberg’s position that spiking pension costs are hindering the city’s ability to balance its budget.

According to the report — titled “Sustainable or Not? NYC Pension Cost Projections through 2060” — pension costs will grow at a slower rate than the city’s economy from 2016 through 2040 and beyond, using up significantly less of its budgeting resources. “Poor market performance over the past decade means we still have a few tough years ahead as those investment losses catch up to us. However, significant reforms already implemented in recent years will drive down costs for decades to come,” Comptroller Liu said in a news release. The Comptroller attributed today’s high pension costs partly to stock market losses.

aiCIO investigated New York City’s underfunded pension system in its Spring issue, revealing the tension between the Mayor and Comptroller. Bloomberg’s goal to reform the City’s pensions operation has not been universally applauded. While Liu is responsible for overseeing New York City’s pension management, Bloomberg hired the City’s first chief investment advisor last year and brought on another senior professional to help run the system’s five pension boards. Insiders claim that Bloomberg favors greater attention to risk management and asset allocation and less emphasis on selecting asset managers, which is primarily Liu’s domain.

To contact the <em>aiCIO</em> editor of this story: Paula Vasan at <a href='mailto:pvasan@assetinternational.com'>pvasan@assetinternational.com</a>; 646-308-2742