Last year provided a break to troubled US defined benefit (DB) pension funds. For a while the rising stock market looked like it would be able to fix the looming crisis. In the airline industry, United Air Lines’ move to possibly terminate its union pension plan is reviving the alarm. In fact the decision could trigger a tidal wave of other airlines looking to do the same and the federal Pension Benefit Guarantee Corporation (PBGC), which insures pension benefits, won’t have the resources to handle the huge burden. In the end this could lead to the ultimate disappearance of DB plans.
Already the number of DB plans has sharply declined in the US from 112,000 in the mid-1980s to just over 31,000 today, which still have 44m members. They mainly work in big, ‘old’ companies and industries – like the airlines, car makers, oil groups – where for decades they have been
a cornerstone of contracts with powerful unions. Even the latter are recognising that the generous benefits - which guarantee a set payout no matter what the stock market’s performances or the company’s profits/losses are – may no longer be feasible for all workers.
A sign of this new awareness comes from the US’s largest airline pilots’ union, the Air Line Pilots Association (ALPA): its president Duane Woerth said in an interview with Reuters that the union’s top leaders are considering negotiating pension changes for its younger members, maybe switching to a DC plan like a 401(k), provided that older workers and retirees receive what they have been promised under the DB system. This new strategy could influence other labour groups.
Richard Ippolito, a researcher with the Cato Institute and a former chief economist for the PBGC, warns that doing nothing is not an alternative. If all the airlines shut down the old pension plans, the PBGC will not be able to fulfil all the obligation and eventually the bill will have to be paid by all taxpayers, a revival of the savings and loan crisis that cost taxpayers about $124bn (e100bn) in the 1980s and early 1990s.
This worrisome scenario came a step closer at the beginning of September, when Continental Airlines declared it would skip contributions to its pension plan this year, exercising its option under federal legislation that allows it (and all companies in the airline and steel industries) to suspend contributions during economically difficult times.
High fuel costs and financial woes in the industry drove its decision, the airline said. Continental has the smallest pension obligation of the big six US carriers, according to a recent Bear Stearns research report. At the end of 2003, Continental’s pension plan was underfunded by $1bn, the Bear Stearns report noted; the carrier had originally planned to contribute $250m to maintain the plan’s funding at 90% of its current liability.
Much bigger is the hole of United’s pension plans: they are underfunded by about $8.3bn. In August the second-biggest US air carrier announced it would skip about $575m of pension contributions this year and it is likely to end all its plans to come out of bankruptcy (it has been in Chapter 11 since 2002). Should United dump its plans onto PBGC, it would be the largest pension default, topping Bethlehem Steel’s $3.6bn in underfunding in 2002. In 2003 the agency assumed control of US Airways (UAIR) pilots’ pension plan, which was underfunded by about $2.5bn.
The total shortfall among US companies with underfunded plans is estimated at between $250bn and $400bn. The PBGC had an $11.2bn deficit at the end of 2003, after taking over plans for 152 companies. “PBGC is basically going to go bankrupt if you look at it from a purely actuarial basis, because it can’t handle the influx of bankrupt pension plans,” says Roger King, senior analyst at CreditSights, an independent debt research firm. “Without changes to funding and premium rules, the agency’s deficit is likely to swell to $18bn in the next 10 years and may reach more than $50bn”, adds Ippolito. The Bush administration itself is concerned: at the end of August in a rare outreach to organised labour, White House, Treasury and other administration officials
met with leaders of the International Association of Machinists to discuss the subject.
The PBGC has currently $40bn in assets and is paying out $3 billion in benefits annually while taking in barely $1bn in premiums. The agency gets most of its premium revenue from a $19 annual charge for every worker whose pension is insured: it’s not enough, but the Congress, which decides the level of premiums, is unlikely to raise it.

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