CHICAGO – The government's pension agency moved Thursday to assume responsibility for the pensions of United Airlines pilots, an action it already faced having to take next year when the bankrupt carrier dumps its defined-benefit pensions.
The move adds another huge burden to a federal agency already operating at a $23 billion deficit. The Pension Benefit Guaranty Corp. (search) estimated it will be responsible for about $1.4 billion of the plan's $2.9 billion in underfunded assets, making it the third-largest claim in the history of the insurance program.
The PBGC said it will be taking over the pensions of more than 14,000 active and retired pilots, many of whose benefits will now be sharply reduced from what they were promised from the airline — a unit of Elk Grove Village, Ill.-based UAL Corp. (UAL).
By acting now instead of when the pilots' pensions are formally terminated, the agency said it is protecting against the possibility of up to $140 million in additional losses.
"The PBGC will protect the pension benefits of United Airlines' pilots up to the limits set by law," said executive director Bradley Belt. "Retirees will continue to receive monthly benefit checks without interruption, and other pilots will receive benefits when they retire."
The agency's announcement comes in the wake of a tentative contract agreement between United and its pilots union earlier this month, part of United's effort to slash labor costs heavily for the second time in its two-year bankruptcy restructuring.
Facing $4.1 billion in required pension contributions by the end of 2008, cash-strapped United said earlier this year it would terminate all its existing employee pensions and replace them with much less expensive defined-contribution funds, similar to 401(k) plans (search).
"As we have indicated all along, we believe the termination and replacement of our defined-benefit pension plans is necessary for United to exit Chapter 11 as a profitable and sustainable enterprise," spokeswoman Jean Medina said Thursday.
The pension agency had objected to the tentative deal with pilots, who dropped their opposition to the pensions' elimination in exchange for additional financial considerations. But it might have little recourse if the deal is approved in bankruptcy court.
"The decision to take over a pension plan is never made lightly, especially in situations where participants won't get everything the company promised but failed to fund," Belt said. "I hope the plight of participants in airline pension plans puts an exclamation point on the need for Congress to strengthen the funding rules for defined benefit plans."
The PBGC planned to file a formal objection to United's pilots plan in bankruptcy court by Friday, spokesman Randy Clerihue said. It is taking over the pensions in the meantime because of the huge savings at stake for the cash-tight agency, he said — including avoiding the annual increase in guaranteed benefits by acting before Jan. 1.
"We find the agreement objectionable on many grounds," he said. "But this plan is going to terminate — it's simply a matter of timing and dollars. Saving the additional money was important to us, given the size of our deficit."
The pilots' union did not immediately respond to a telephone message.