Judge Rejects U.S. Airways Pension Request
Tuesday December 30, 4:09 pm ET
By John Crawley
WASHINGTON (Reuters) - A judge has upheld a $2.1 billion government claim against US Airways (NasdaqNM:UAIR - News), rejecting the airline's bid to reduce its huge liability for a pilots retirement plan that was terminated this year.
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The decision Monday evening by Judge Stephen Mitchell of the U.S. Bankruptcy Court for the Eastern District of Virginia does not mean that the underfunded plan will be made whole. But it could stem overall losses for the aviators, although they are likely to gain only pennies on the dollar.
It will also narrow options for airlines and companies in other industries for reducing huge shortfalls in their employee retirement accounts.
US Airways terminated its pilots pension account in March, saying it could not afford it and could not emerge from bankruptcy without doing so.
The company then created a cheaper plan for current pilots and turned over the balance of the terminated account to the federal agency responsible for insuring corporate pensions, the Pension Benefit Guaranty Corp.
It is the responsibility of the PBGC, which is struggling with its own financial problems, to determine the amount of the old plan, identify existing assets and seek additional assets as an unsecured creditor.
The PBGC claims the terminated plan was worth more than $3.3 billion. Roughly $1.2 billion of that represents undisputed assets held by the plan when it was terminated. The remaining $2.1 billion represents the PBGC's claim of what the airline should contribute to resolve its liability.
But US Airways contends the method for calculating the liability is flawed because it relies on a discount interest rate often tied to conservative insurance annuities, which at the time the deficit was computed, was 5.1 percent.
The airline sought Mitchell's approval to use a higher rate -- 8 percent - that would tie assumptions for pension fund gains to the broader performance of markets.
Because it is assumed that investments at a higher rate would return more over time, the company's contribution would go down. At 8 percent, US Airways said the underfunded amount of the pilots' plan would be roughly $900 million, less than half of what the PBGC estimates it owes.
Steven Kandarian, executive director of the pension benefit agency, said the judge's ruling makes it clear that companies cannot use certain assumptions to "artificially slash" pension underfunding and "escape" their obligation.
"As an unsecured creditor, PBGC can only hope to recover pennies on the dollar for a plan's unfunded benefit liabilities, but those pennies add up," Kandarian said.
US Airways said it was disappointed with Mitchell's decision and would weigh its appeal options. But it also noted the ruling does not create additional financial hardship because any payout would be in stock already allotted to a pool for creditors.
In this case, the payout in stock will wind up being a fraction of what the government says is owed.
Nevertheless, the decision is important for how companies can calculate employee pensions, which in a number of industries are a source of deepening concern. Underfunded accounts are weighing down many well-known and mostly older companies, such as bankrupt United Airlines (OTC BB:UALAQ.OB - News), which has unsuccessfully pushed Congress to change pension funding rules.
Tuesday December 30, 4:09 pm ET
By John Crawley
WASHINGTON (Reuters) - A judge has upheld a $2.1 billion government claim against US Airways (NasdaqNM:UAIR - News), rejecting the airline's bid to reduce its huge liability for a pilots retirement plan that was terminated this year.
ADVERTISEMENT
The decision Monday evening by Judge Stephen Mitchell of the U.S. Bankruptcy Court for the Eastern District of Virginia does not mean that the underfunded plan will be made whole. But it could stem overall losses for the aviators, although they are likely to gain only pennies on the dollar.
It will also narrow options for airlines and companies in other industries for reducing huge shortfalls in their employee retirement accounts.
US Airways terminated its pilots pension account in March, saying it could not afford it and could not emerge from bankruptcy without doing so.
The company then created a cheaper plan for current pilots and turned over the balance of the terminated account to the federal agency responsible for insuring corporate pensions, the Pension Benefit Guaranty Corp.
It is the responsibility of the PBGC, which is struggling with its own financial problems, to determine the amount of the old plan, identify existing assets and seek additional assets as an unsecured creditor.
The PBGC claims the terminated plan was worth more than $3.3 billion. Roughly $1.2 billion of that represents undisputed assets held by the plan when it was terminated. The remaining $2.1 billion represents the PBGC's claim of what the airline should contribute to resolve its liability.
But US Airways contends the method for calculating the liability is flawed because it relies on a discount interest rate often tied to conservative insurance annuities, which at the time the deficit was computed, was 5.1 percent.
The airline sought Mitchell's approval to use a higher rate -- 8 percent - that would tie assumptions for pension fund gains to the broader performance of markets.
Because it is assumed that investments at a higher rate would return more over time, the company's contribution would go down. At 8 percent, US Airways said the underfunded amount of the pilots' plan would be roughly $900 million, less than half of what the PBGC estimates it owes.
Steven Kandarian, executive director of the pension benefit agency, said the judge's ruling makes it clear that companies cannot use certain assumptions to "artificially slash" pension underfunding and "escape" their obligation.
"As an unsecured creditor, PBGC can only hope to recover pennies on the dollar for a plan's unfunded benefit liabilities, but those pennies add up," Kandarian said.
US Airways said it was disappointed with Mitchell's decision and would weigh its appeal options. But it also noted the ruling does not create additional financial hardship because any payout would be in stock already allotted to a pool for creditors.
In this case, the payout in stock will wind up being a fraction of what the government says is owed.
Nevertheless, the decision is important for how companies can calculate employee pensions, which in a number of industries are a source of deepening concern. Underfunded accounts are weighing down many well-known and mostly older companies, such as bankrupt United Airlines (OTC BB:UALAQ.OB - News), which has unsuccessfully pushed Congress to change pension funding rules.
