United Airlines' proposal to halt payments to its pension funds suggests serious problems in the nation's pension-guarantee system, according to Wharton faculty and pension experts. The troubled airline, which declared bankruptcy in December 2002, said in July that it would stop funding its pension plans while it struggles to restructure under bankruptcy protection. Two of the company's unions challenged the decision, but last week a federal bankruptcy judge gave the airline another month to work out a restructuring solution.
United isn't alone in its pension problems. Declining stock prices, low interest rates, and fierce corporate competition, both domestic and foreign, have put pressure on companies to back away from pension promises and could eventually lead to a taxpayer bailout.
The Pension Benefit Guarantee Corp. (PBGC), the quasi-government agency that insures private pensions for 44 million workers and retirees, has objected to United's plan, and warns that the airline's $8.3 billion underfunding is just part of a $400 billion gap between the assets and liabilities of private companies' defined benefit plans.
United's problems became front-page news last month when it failed to make a $72.4 million payment that was owed to three of its employee pension plans. The company said it planned to forgo additional payments as a condition of a new financing pact that would allow the company to emerge from bankruptcy.
"The United case raises some very important implications, not only for its own employees but for the rest of the airline industry. I think it also raises questions about the PBGC. It really can't take many more hits like this," says Olivia Mitchell, Wharton professor of insurance and risk management.
In addition to lower stock prices, pension funds have been hurt by lower interest rates, which inflate the value of pension obligations to be paid out – thereby requiring companies to put even more money into their funds in the short-run.
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