Government to receive $1 billion United shares for taking over pension plans
In return for the federal government to take over United Airlines’ employee pension plans, it was learned yesterday, the federal agency that insures pensions could receive United shares worth $1 billion or more when the airline emerges from bankruptcy, according to a settlement agreement to be submitted to federal bankruptcy court for approval.
The federal government announced late last week that it had reached an agreement to take over all of United Airlines’ employee pension plans, which are under funded by $9.8 billion, making it the biggest pension failure since the government began insuring pension benefits in 1974, reported the New York Times.
If approved by the bankruptcy court, removal of the pension liability, would make it more likely for UAL Corporation, owner of United, to close on $2 billion in financing it has lined up and ultimately help it emerge from the bankruptcy filed in December 2002.
Although not happy about it, the pilots’ union had already agreed that United could terminate its pension plan. But flight attendants, who had hoped to preserve their plan, remain angry.
United would replace the pension with, at much less cost, with a 401(k) like plan, giving it a significant cost advantage over rivals like Northwest Airlines, Delta Air Lines, Continental Airlines and American Airlines, who also have short-falls in the funding of their employee pension funds. Industry experts believe these airlines could follow United’s action.
The termination of United’s pension plans, though long expected, will also worsen the finances of the government’s Pension Benefit Guaranty Corporation, which has been coping with a number of large pension failures since 2002. Some economists and analysts have warned that the agency is looking increasingly like a candidate for a taxpayer bailout.
The government estimated that the pension agency will cover about $6.6 billion of United’s shortfall. The remainder, about $3.2 billion, will be borne by United’s retirees, in the form of benefit reductions. Different retirees will be affected in different ways, depending on their age and other factors. In general, the pilots are expected to lose the most, because they have been promised rich pensions that exceed the government’s insurance limits, reported the NY Times.
Charles Kao
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