Pensions Funding

[BigRed1]

From: "MEC Communications" <ualmec@united.alpamail.org> [
To: "UAL Pilots" <ual-mec@united.alpamail.org>
Subject: Letter from MEC Chairman Captain Mark Bathurst, Q&A Regarding UAL Decision on Deferring Payments to Employee Pension Funds
Date: Wed, 14 Jul 2004 16:03:30 +0000


Dear Fellow Pilot,



On Wednesday, United Airlines filed notice with the Securities and Exchange Commission (SEC) its intention to defer a decision on making payments to employee pension funds for July. This deferral will not affect pilot pension funds. This filing will undoubtedly be splashed in headlines in business sections of major newspapers across the country, creating undue and unnecessary consternation among you and your fellow employees.



It is vital to understand that this is a deferral of the Company’s decision to fund employee pension plans. It is a strategic decision based on the fact that United Airlines is in bankruptcy, and the Company feels it must maintain as high a cash balance as possible. We urge you not to allow this news to create undue emotional upheaval within our ranks.



It is important for you to understand that this decision by United has absolutely no bearing on pilots’ pension plans. United’s obligations to the pilot pension plans have been satisfied throughout 2004 as a result of credits from previous years.



To address some of the questions many of you may have regarding the Company’s deferral, the MEC’s Retirement & Insurance Committee has compiled the following “Question and Answer†document.



Fraternally,



Captain Mark Bathurst

Chairman, United MEC


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UAL-MEC R&I Committee

Q&As Regarding Today's Announcement by UAL

Concerning Deferred Pension Payments




Question: What has the Company announced about pensions?



Answer: The Company has announced that it is choosing to defer the decision to make a quarterly pension contribution due July 15th to Management/Salaried, Union Ground and Flight Attendant defined benefit pension plans.



Question: Why has the Company made a formal public announcement?



Answer: In general, federal pension law requires the sponsor of a defined benefit pension plan (like our Pilot A-Plan) to make quarterly installment payments of its required contributions. If the sponsoring company does not make a quarterly contribution on time, it is legally required to give plan participants written notice of that fact. The Company also has disclosure obligations under the federal securities laws and bankruptcy court procedures.



Question: Will I be getting a notice?



Answer: No. The Company’s decision to defer its quarterly pension contributions does not relate to the Pilot’s A-Plan.



Question: Why isn’t the Pilot Plan affected?



Answer: The Pilot A-Plan is not affected because there is no quarterly contribution currently due. Under the funding rules, the Company has a credit balance from prior years’ contributions to our A-Plan which is more than sufficient to cover, not only the quarterly contribution that would otherwise be due this month, but all the required contributions for the rest of 2004.



Question: What does the Company’s deferral of its contributions to the other plans have to do with my benefits under the Pilots A-Plan?



Answer: Nothing.



Our Plan is still in effect and pilots are continuing to earn benefits under the Plan in accordance with the Plan provisions. The deferral does not change the funding of our Plan.



Question: I’ve heard rumors that the Company is going to unilaterally stop paying partial lump sums. Is there anything to this?



Answer: Nothing.



The Company has not given any indication of any such intention. If such an attempt were made, it would encounter major legal difficulties under the Employee Retirement Income Security Act (ERISA), the collective bargaining agreement and in the Bankruptcy Court.



Question: How does the Company’s decision to defer its contributions affect its funding obligations to the other plans?



Answer: The Company is postponing its contribution obligation. The Company still owes the deferred contributions and interest will continue to accrue on the amount of those contributions. At the time it emerges from bankruptcy, if not before, the Company will have to make up all deferred contributions.



Question: Does the Company incur any penalty because it hasn’t made its payments on time?



Answer: The unpaid amounts bear interest and, if the Company isn’t current in its contributions by September 15, 2005, it is subject to an excise tax on the amount of the “funding deficiency†for the 2004 Plan Year.



Question: Why has the Company decided to defer its July quarterly contributions to the non-pilot plans?



Answer: The Company has publicly stated its reasons for the decisions in the following statement:



“Deferring a decision on whether to make the quarterly contributions due July 15, 2004 is a prudent, responsible step that increases our flexibility while we work to secure exit financing from the capital markets.



“Deferring this decision will allow us to manage our resources in a challenging and uncertain marketplace.



“This action does not affect the benefits currently being paid under these plans, or United's pension obligations.



“As part of our responsible stewardship of the company's assets, we are assessing our future pension obligations, but no decisions have yet been made.â€



Question: Do the affected employee groups have the ability to challenge the Company’s decision to defer?



Answer: The affected employees or their unions might file a grievance under their collective bargaining agreements or challenge the deferral in the Bankruptcy Court, or both. However, before taking such action, any union confronted with the situation would have to make a judgment whether, based on all the circumstances, the long term interest of the employees is best served by insisting on immediate payment of the contributions or by going along with the deferral. If the decision was to challenge the deferral, it is difficult to predict the outcome.



Question: Has any other airline ever missed its pension contributions?



Answer: Yes, at least one. Hawaiian Airlines stopped contributing to its pilots’ A-Plan in September 2003. The plan has not terminated and a motion is now pending in the Bankruptcy Court to allow payment of all the missed contributions.

 

[The Ronin]

Gee....and I wonder how everyone ELSE feels who is not a pilot???? Since 'ol Pete has targeted maintenance again for areas of "cuts", and the pilots are getting a free pass once again on ths shoulders of everyone else....perhaps we are approaching the time to take a bow, heck we don't need so many airplanes anyways....they cost to much too operate

 

[737nCH11]

Waaaaaaaa!!!!! Jeez, certain folks whine more than jet engines. :blink:

 

[Borescope]

All it is is a DEFERAL. The money still has to be paid down the road, That is, unless they go to the court and get the judge to side with them on the cancelation of the retirement programs they can't afford.

 

[The Ronin]

Waaaaaaaa!!!!! Jeez, certain folks whine more than jet engines

Yeah, the hearing tends to go after daily exposure...BUT then again...you wouldn't really know much about that these days would you?

 

[737nCH11]

I'm implying that you do an inordinate amount of bitching and whining on this site. What are you implying?

 

[TJoe]

All it is is a DEFERAL. The money still has to be paid down the road, That is, unless they go to the court and get the judge to side with them on the cancelation of the retirement programs they can't afford.

By MICHELINE MAYNARD and MARY WILLIAMS WALSH

Published: July 15, 2004



nited Airlines said yesterday that it would put off making $72.4 million in payments to its employee pension funds, a move that experts said signaled that the airline was likely to seek deep cuts in one or more of its retirement plans.


The action, disclosed in a filing with the Securities and Exchange Commission, was the first significant step taken by the bankrupt airline since its application for federal loan guarantees was rejected at the end of June.


Though United - a subsidiary of UAL - has been in Chapter 11 bankruptcy since December 2002, it has been operating normally; until now it has made good on all its mandatory pension contributions, even as it negotiated other wage and benefit cuts from its unions.


Pension specialists said that United's move was an ominous sign. "In our experience, it's exceedingly rare for companies that miss legally required contributions to later make up the shortfall," said Randy Clerihue, a spokesman for the Pension Benefit Guaranty Corporation, the federally sponsored agency that insures pension plans against default.


United's move came just two days after executives of the airline cautioned employees that the company would have to dig deeper on costs, as it strives to line up new lenders and investors to help it emerge from bankruptcy. The airline said in its filing that the deferral would have no immediate effect on the monthly benefits received by its retirees.


Leaders of some of the company's unions reacted with dismay to the deferral. The International Association of Machinists and Aerospace Workers issued a statement saying United's failure to meet its pension obligations "clearly threatens the stability of those plans." The Association of Flight Attendants said it was worried that the airline might take even more drastic action, by terminating one or more of the plans. Officials for both unions said they had no warning of the airline's move.


But Herb Hunter, a United captain who is a spokesman for the Air Line Pilots Association, said the action made financial sense. "They are trying to do the responsible thing, to conserve cash and get themselves situated to come out of bankruptcy," Mr. Hunter said.


The four pension funds United operates for its workers are in varying states of financial health; by some measures, the pilots' plan is the strongest, and it was not scheduled to receive any of the deferred payments. By another measure, however, United's decision suggested that the pilots were shouldering a growing, but invisible, degree of risk.


If measured as a continuing pension plan with an unlimited future - the method used for calculating contributions - the pilots' plan appears to be fully funded now, and United owes it no additional money. But if it is measured as if it were about to be shut down, the pilots' plan would have a $2.5 billion shortfall, and some pilots would suffer large and painful losses. The government insurance program, already weak, would bear part of the blow.


The other three pension plans at United all have contributions coming due today: $38.6 million for the mechanics, $19.7 million for the flight attendants and $14.1 million for counter representatives and others who deal with the public. All of those are being deferred by the airline.


Since it entered bankruptcy, United has cut its annual costs by some $5 billion, half of it through wage and benefit reductions accepted by its unions last year. Some of those reductions were achieved by slowing the rate that current employees build up their pensions. But the benefits that United's employees and retirees have already earned cannot legally be reduced - short of a full-blown pension default - and they are still being carried on the airline's books as a form of long-term debt. The payments due today were supposed to keep United current on that debt.


Technically, United said it was deferring a decision on whether to make the pension payments, the minimum contributions that airlines with traditional defined-benefit plans must make each quarter. Companies with plans that are fully funded are required to contribute only annually, but most airline plans are currently below that level.


The airline said in its filing that it took the step to "manage resources and preserve its options."


United reckons that it will have to make $4.1 billion in payments to its pension plans over the next five years. But to attract at least $2 billion in new capital to emerge from bankruptcy, experts say that the airline will almost certainly have to reduce that burden.


United had hoped to emerge this year with the help of federal loan guarantees, but the Air Transportation Stabilization Board turned United down on June 28, saying it believed that the airline could find financing without its help.





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The next quarterly payments to United's pension funds, about $100 million, will come due in mid-October. Separately, United is supposed to pay about $500 million in mid-September to catch up on pension contributions that it owes from 2003, according to a spokeswoman for the airline.


Union leaders and industry analysts said that United's deferral decision might be a sign that the airline did not intend to make those payments either, and will instead seek to pare the plans or terminate them entirely.


Robert W. Mann Jr., an industry consultant based in Port Washington, N.Y., called the action "a shot across the bow that 'we're going to have to make big changes.' " Mr. Mann said he thought United officials were telegraphing that that they saw no point in contributing to the pension funds now if they were soon going to be cut.


"It signals an unwillingness to spend scarce cash on obligations that may, at a later point, be avoidable," he said.


Mr. Hunter of the pilots' union disagreed. "We don't see it as a shot across the bow," he said. "If we're wrong, we'll find that out down the road." He said his union's main concern was the "psychological effect" of the move on United workers. "From our point of view, we see this as a nonstory except for the fact that it scares the employees," he said.


For its part, United said that it was only putting off payments, not skipping them entirely. United said that it had until Sept. 15, 2005, to make good, though it would face penalties for being late.


Other authorities on pension law disagreed. Companies that fail to make their pension contributions on time are violating the law, they said, but the fact that United is in bankruptcy leaves regulators unable to apply the usual penalties.


Normally, the Internal Revenue Service can impose excise taxes on companies that miss their annual pension contributions, and the Pension Benefit Guaranty Corporation automatically places liens on the assets of companies that skip payments. But the agency cannot attach the assets of a company in bankruptcy.


"The consequences of missing a payment in bankruptcy are a lot less severe than the consequences outside of bankruptcy," said Gary Ford, a former general counsel for the pension agency who is now a managing principal at the Groom Law Group.


Mr. Clerihue, the pension agency spokesman, expressed concern that if United ultimately defaulted on one or more pension plans, any missed contribution from yesterday's decision would make the plan's loss still bigger.

 

[Borescope]

You cut and pasted a story so what's your point ?

 

[Borescope]

Herb Hunter, a United captain who is a spokesman for the Air Line Pilots Association, said the action made financial sense. "They are trying to do the responsible thing, to conserve cash and get themselves situated to come out of bankruptcy," Mr. Hunter said.

This would be a totally different comment if there was a deferral of contributions to the pilots fund. :down:

 

[737nCH11]

Just wait. Our time is coming.

 

[mrfish3726]

OH NO another defferal to the already 4+ billion that's underfunded. Is that pension insured by the FED's :unsure:

 

[MCI transplant]

<_< Yes! It's called the PBGC------ But their going broke also! And, as you know, it may not be "Dollar for Dollar!" :down: