PBGC offers facts on AA

[Maark767]

I thought this might be an attempt to "fully fund" the pensions to make it more difficult for the PBGC to refuse the pension?

Not sure but time will tell. PBGC is going to be tough with AMR no matter what. That seems to be the tone.

 

[BoeingBoy]

I thought this might be an attempt to "fully fund" the pensions to make it more difficult for the PBGC to refuse the pension?

Unlikely. If the plans were fully funded they would be less likely to qualify for termination, which would make it harder to turn them over to the PBGC, not easier. As far as I know, qualification for what's called a distress termination is spelled out in the laws governing DB pensions - a company either meets the requirement or not. That is what the bankruptcy Judge will look at if AA files to terminate it's DB pensions. Besides, $6.5 million is a drop in the ocean compared to the $10 billion +/- unfunded liability.

Freezing DB plans is an option that doesn't involve the PBGC since they don't take over the plan. While not saving the money that termination would - contributions stop when the plan is terminated - it saves money relative to keeping the DB plans going. With frozen plans new people aren't added to the plans because of hiring, while people continue to leave the plan due to primarily death. Thus the pool of covered employees shrinks over time, eventually reaching zero employees covered. The company can calculate what it's total future liability is based on actuarial data and as the pool of covered employees shrinks the payments into the plans also shrinks.

There is another factor that may, but probably won't, come into play - it did in US' first bankruptcy when the pilot's DB plan was terminated. In that bankruptcy the Judge ruled that the pilot's DB plan met the requirements for a distress termination but that he couldn't approve the distress termination because the DB plan was part of the contract. That meant that only the pilot's, through their representatives (the MEC) or by a vote, could approve termination of the DB plan. Note though, that the Judge had already approved what was called LOA 93 which amended the contract under section 1113 with concessions. In LOA 93, the company hadn't asked for or received the union's permission to terminate the DB plan. So by the time US decided it was necessary to terminate the plan it was too late to include that in the contract changes approved by the Judge. However, I'd suspect that AA would have their ducks lined up before filing an 1113 motion and ask for contract changes terminating or freezing the DB plans in 1113 negotiations if that's what they want to do (for plans that are included in the contract).

Jim

 

[Buck]

Unlikely. If the plans were fully funded they would be less likely to qualify for termination, which would make it harder to turn them over to the PBGC, not easier. As far as I know, qualification for what's called a distress termination is spelled out in the laws governing DB pensions - a company either meets the requirement or not. That is what the bankruptcy Judge will look at if AA files to terminate it's DB pensions. Besides, $6.5 million is a drop in the ocean compared to the $10 billion +/- unfunded liability.

Freezing DB plans is an option that doesn't involve the PBGC since they don't take over the plan. While not saving the money that termination would - contributions stop when the plan is terminated - it saves money relative to keeping the DB plans going. With frozen plans new people aren't added to the plans because of hiring, while people continue to leave the plan due to primarily death. Thus the pool of covered employees shrinks over time, eventually reaching zero employees covered. The company can calculate what it's total future liability is based on actuarial data and as the pool of covered employees shrinks the payments into the plans also shrinks.

There is another factor that may, but probably won't, come into play - it did in US' first bankruptcy when the pilot's DB plan was terminated. In that bankruptcy the Judge ruled that the pilot's DB plan met the requirements for a distress termination but that he couldn't approve the distress termination because the DB plan was part of the contract. That meant that only the pilot's, through their representatives (the MEC) or by a vote, could approve termination of the DB plan. Note though, that the Judge had already approved what was called LOA 93 which amended the contract under section 1113 with concessions. In LOA 93, the company hadn't asked for or received the union's permission to terminate the DB plan. So by the time US decided it was necessary to terminate the plan it was too late to include that in the contract changes approved by the Judge. However, I'd suspect that AA would have their ducks lined up before filing an 1113 motion and ask for contract changes terminating or freezing the DB plans in 1113 negotiations if that's what they want to do (for plans that are included in the contract).

Jim

Yes but may not qualify as a destressed pension, but the PBGC qualifies as distressed, right?

 

[BoeingBoy]

Undoubtedly, but it's unlikely that they'd declare bankruptcy. Besides, who would they then dump the pension they're responsible for on. No, as long as the federal government has the power to tax and print money there will be no distress termination by the PBGC.

Jim

 

[Buck]

Undoubtedly, but it's unlikely that they'd declare bankruptcy. Besides, who would they then dump the pension they're responsible for on. No, as long as the federal government has the power to tax and print money there will be no distress termination by the PBGC.

Jim

Do you believe that $1.2 Trillion would cover it?

 

[tech2101]

Unlikely. If the plans were fully funded they would be less likely to qualify for termination, which would make it harder to turn them over to the PBGC, not easier. As far as I know, qualification for what's called a distress termination is spelled out in the laws governing DB pensions - a company either meets the requirement or not. That is what the bankruptcy Judge will look at if AA files to terminate it's DB pensions. Besides, $6.5 million is a drop in the ocean compared to the $10 billion +/- unfunded liability.

Freezing DB plans is an option that doesn't involve the PBGC since they don't take over the plan. While not saving the money that termination would - contributions stop when the plan is terminated - it saves money relative to keeping the DB plans going. With frozen plans new people aren't added to the plans because of hiring, while people continue to leave the plan due to primarily death. Thus the pool of covered employees shrinks over time, eventually reaching zero employees covered. The company can calculate what it's total future liability is based on actuarial data and as the pool of covered employees shrinks the payments into the plans also shrinks.

There is another factor that may, but probably won't, come into play - it did in US' first bankruptcy when the pilot's DB plan was terminated. In that bankruptcy the Judge ruled that the pilot's DB plan met the requirements for a distress termination but that he couldn't approve the distress termination because the DB plan was part of the contract. That meant that only the pilot's, through their representatives (the MEC) or by a vote, could approve termination of the DB plan. Note though, that the Judge had already approved what was called LOA 93 which amended the contract under section 1113 with concessions. In LOA 93, the company hadn't asked for or received the union's permission to terminate the DB plan. So by the time US decided it was necessary to terminate the plan it was too late to include that in the contract changes approved by the Judge. However, I'd suspect that AA would have their ducks lined up before filing an 1113 motion and ask for contract changes terminating or freezing the DB plans in 1113 negotiations if that's what they want to do (for plans that are included in the contract).

Jim

Thank you for the great explanation Jim. That should be required reading for all the AA employees.

 

[dfw gen]

the only thing that does change in the event of retirement plan termination is that now the PBGC is a creditor. in other words right now the PBGC is on the employee side of "the table". When or if the plans are terminated the PBGC receives stock in the new company. That means that there is now an additional creditor with a large claim against the company sitting across from "us" looking for a new profitable company.

 

[BoeingBoy]

in other words right now the PBGC is on the employee side of "the table".

I wouldn't put too much faith in that - the PBGC is looking out for itself. It doesn't want another $10 billion or so of unfunded liability dropped in it's lap, which happens to coincide with the employee's desire, but if it can prevent that it couldn't care less if AA becomes profitable or not. All it takes is for the Judge to rule that the DB plans qualify for distress termination and the PBGC is stuck with them. After that it will follow the law to determine benefits - how it affects any individual employee is of little concern.

Jim

 

[FWAAA]

the only thing that does change in the event of retirement plan termination is that now the PBGC is a creditor. in other words right now the PBGC is on the employee side of "the table". When or if the plans are terminated the PBGC receives stock in the new company. That means that there is now an additional creditor with a large claim against the company sitting across from "us" looking for a new profitable company.

I agree with BoeingBoy. IMO, the interests of the PBGC are not aligned at all with AA's employees except for one small workgroup: the pilots whose A plan pension exceeds the PBGC maximum. If AA terminates the pension (which PBGC argues is not necessary for AA's survival), the pilots will lose benefits already accrued because their pensions exceed the monthly PBGC maximum.

The PBGC does not the unfunded liability of the AA pensions, and so it's arguing that AA doesn't HAVE to terminate the plans to thrive after bankruptcy. If AA terminates the plans, the PBGC is there to fight for the largest piece of the new stock the other creditors will agree to, and that doesn't help AA's employees (pilots or anyone else) at all. Every share of new stock the PBGC gets is a share that someone else cannot get, including AA's employes.

If AA freezes the pensions (hard freeze) the accrued benefits will stop. Everyone will the pension they have earned up to now (the pension you'd get at 60 or 65 if you quit now). If AA terminates the pension, everyone will get the exact same thing, unless their pension exceeds the PBGC maximum (those pilots who have a substantial monthly A plan pension check). Everyone else will be treated the same whether it's a termination or freeze. As many have been posting here over the last nine years, the only employees who lose in a termination v freeze are the pilots. They had a lot more to lose if the plans were terminated. Maybe they'll do what they can to get AA to only freeze their plan and not terminate it (no doubt that would require some steeper concessions compared to a termination).

 

[usa1]

GOVERNMENT IS 15 TRILLION IN THE HOLE ~ & the PBGC IS BROKE?

Who's on the Hook? Taxpayers

The PBGC is supposed to be funded entirely from two sources: insurance premiums that employers pay, and the assets of the pension plans that the government entity takes over. But usually, the whole reason the PBGC comes in to manage a pension plan is because it's underfunded -- sometimes severely.

For instance, within the four pension plans that AMR sponsors, the plans have a funding shortfall of more than $10 billion, with $18.5 billion in liabilities offset by just $8.3 billion in assets. It's easy to see how just a single big-employer failure can put big financial stresses on the PBGC.

Moreover, just as the weak economy has hurt businesses, it has also left the PBGC with a severe funding shortfall. Last month, the PBGC announced a record deficit in 2011 of $26 billion, the largest in its 37-year history. With an anticipated $107 billion in liabilities to pay pension recipients and only $81 billion in assets to cover them, the PBGC may join the long list of private companies and government-sponsored entities that end up needing a taxpayer bailout.

http://www.dailyfinance.com/2011/12/27/why-your-pension-is-at-risk/

 

[jersey777]

I agree with BoeingBoy. IMO, the interests of the PBGC are not aligned at all with AA's employees except for one small workgroup: the pilots whose A plan pension exceeds the PBGC maximum. If AA terminates the pension (which PBGC argues is not necessary for AA's survival), the pilots will lose benefits already accrued because their pensions exceed the monthly PBGC maximum.

The PBGC does not the unfunded liability of the AA pensions, and so it's arguing that AA doesn't HAVE to terminate the plans to thrive after bankruptcy. If AA terminates the plans, the PBGC is there to fight for the largest piece of the new stock the other creditors will agree to, and that doesn't help AA's employees (pilots or anyone else) at all. Every share of new stock the PBGC gets is a share that someone else cannot get, including AA's employes.

If AA freezes the pensions (hard freeze) the accrued benefits will stop. Everyone will the pension they have earned up to now (the pension you'd get at 60 or 65 if you quit now). If AA terminates the pension, everyone will get the exact same thing, unless their pension exceeds the PBGC maximum (those pilots who have a substantial monthly A plan pension check). Everyone else will be treated the same whether it's a termination or freeze. As many have been posting here over the last nine years, the only employees who lose in a termination v freeze are the pilots. They had a lot more to lose if the plans were terminated. Maybe they'll do what they can to get AA to only freeze their plan and not terminate it (no doubt that would require some steeper concessions compared to a termination).

One problem though is that the PBGC reduces the benefit if you retire under 65. The flight attendants can retire with full retirements at 60 but will take a reduction at that age if the pension fund is handed to the PBGC.

 

[FWAAA]

One problem though is that the PBGC reduces the benefit if you retire under 65. The flight attendants can retire with full retirements at 60 but will take a reduction at that age if the pension fund is handed to the PBGC.

Good point - I'd overlooked that. For any flight attendant already retired at age 60 with a monthly pension check in excess of $2,925 (single life annuity - or $2,632/mo for joint and survivor annuity) or an active FA who planned to retire at age 60 who has already accrued a pension larger than that, there would be a reduction of their pension down to those limits if the pension is terminated.

If there are active FAs with accrued benefits already larger than those limits, and the pension is terminated, they could dramatically increase their payout by working until 65, where their limits would be $4,500/mo (single life) or $4,050/mo (joint & survivor). How common is early retirement among the FAs?

 

[tech2101]

Good point - I'd overlooked that. For any flight attendant already retired at age 60 with a monthly pension check in excess of $2,925 (single life annuity - or $2,632/mo for joint and survivor annuity) or an active FA who planned to retire at age 60 who has already accrued a pension larger than that, there would be a reduction of their pension down to those limits if the pension is terminated.

If there are active FAs with accrued benefits already larger than those limits, and the pension is terminated, they could dramatically increase their payout by working until 65, where their limits would be $4,500/mo (single life) or $4,050/mo (joint & survivor). How common is early retirement among the FAs?

It really hurts that pilots that are required to retire at an age lower than the 65 limit from the PBGC. Ask the UAL pilots who took a huge bath.

 

[Bob Owens]

It really hurts that pilots that are required to retire at an age lower than the 65 limit from the PBGC. Ask the UAL pilots who took a huge bath.

That's gone, they are no longer required to retire at 60.

 

[eolesen]

Bob, I read that to mean those pilots who are forced into retirement prior to 65 because they fail their FAA medical, or otherwise wind up grounded.