Thursday, May 12, 2005

The end of pensions

The end of pensions
In the future, will any company offer a pension?
By Dan Ackman

NEW YORK - In the future, will any company offer a pension? The answer is probably not, and the future is getting closer all the time.

Tuesday a U.S. federal Bankruptcy judge approved a plan by UAL, the parent company of United Airlines, to transfer its pension plans, which are underfunded by $9.8 billion, to the Pension Benefit Guaranty Corp., which is itself underfunded.

UAL's move is expected to spur similar actions by other so-called legacy carriers among the airlines, which are squeezed by high costs, competition from airlines without substantial pension obligations and, lately, by rising fuel costs.

More broadly, UAL's action takes place against a looming retirement crisis in which the relatively benign problems of the Social Security system are just a part (see "Retirement Doomsday").

The decline of pensions is likely well past the tipping point already. No so long ago, the defined benefit pension -- guaranteed retirement income -- was a prevalent aspect of the U.S. financial scene. But no more. In 1980, 38 percent of Americans had a defined benefit pension as their primary retirement plan. By 1997, just 21 percent of Americans had such plans, according to the Pension Benefits Council. That percentage is certainly lower now, and more and more plans have been passed off to the PBGC, a federal agency that insures pensions, but which does not necessarily pay the benefits retirees expected.

The ratio of active to inactive workers in existing defined benefit pension plans has fallen to roughly 1-to-1, down from more than 3.5-to-1 in 1980, according to the PBGC. This retirement math is starker than that faced by the Social Security system. The PBGC now pays the pensions of more than 1 million retirees.

While many more workers now have retirement savings plans such as 401(k)s, relatively few have sufficient assets to fund their retirements in a way that will maintain all or most of their pre-retirement incomes.

United's unions are preparing to fight the decision made by the company and permitted by the bankruptcy court, and they have threatened to strike. But with the defined pensions now a decidedly minority benefit, their partial loss is not likely to resonate politically or among United's customers.

More likely, the court's decision will encourage other airlines to follow suit. US Airways Group, which, like UAL, is in bankruptcy, terminated the last of its pension plans earlier this year. Tuesday, Delta Air Lines said it might have to seek bankruptcy protection, too, adding that it expected a significant loss for 2005. The airline industry already has the second-most beneficiaries of any industry covered by the PBGC guaranties. Steel is by far the first. Unlike steel, however, the airline industry is not in a long-term slide in terms of total employment, despite its financial troubles over the past several years.

The PBGC guarantees corporate pension plans and pays benefits to retirees when company plans fail. When it takes over a plan, it receives its assets as well as its liabilities, and also collects insurance premiums from the plans it guarantees. So far, the agency has been able to meet its obligations, but currently it faces a $23.3 billion deficit between its assets and long-term liabilities. The takeover of the UAL pension plan is already factored in that number. Overall, it backstops the pensions of 44.3 million beneficiaries.

The bankruptcy court frees UAL from $3 billion in pension contributions over the next five years. But the shortfall between its pension plan assets and its liabilities is much greater, nearly $10 billion, according to PBGC estimates.

It is not immediately clear which beneficiaries will be paid less and by how much. The PBGC's maximum guaranteed benefit is adjusted yearly. This year, the maximum paid to most retirees is $45,614 for a 65-year-old, so those who are now due more or who retire earlier would be paid less.

UAL says unloading its pensions is critical to obtaining the $2 billion or more in debt financing it needs to get out of bankruptcy. However necessary, in a world where employer-paid pensions are increasingly rare, unloading pension obligations is likely to become increasingly common.