C11 and Pensions
Otterman, Ign Ov., Wake TB,
I think there is a general misunderstanding of Chapter 11 and the pensions of US pilots.
Chapter 11 is a mgmt tool that allows the mgmt, at the discretion of the Creditors Committee established to represent the bests interests fo the enterprise, to reorganize the entity into a forward-looking, on-going company. Both the Federal Bankruptcy Judge and the Creditors Committee have to comply with the intended direction of the company coming out of BK.
One of the immoral by-products of Chapter 11 are the 1113c and 1113e sections, which allow the company to renege on contracts after a suitable period of "negotiation." During this time, most company tells unions they want $X billions of dollars in concessions and then the "negotiations" are to determine where the money will come from. The 1113c is a "consentual" change in the contracts after "negotiations." 1113e is the "emergency" changes to contracts that come when the mgmt convinces the judge that the need to save the dollars in the 1113e filing is dire and immediate for the well-being of the corporation's ability to reorganize successfully.
So, in short, a company tells its unions that they are filing an 1113c motion so start negotiating for 51 days. At the end of that time, if no agreement has been arrived at, they file an 1113e motion to get the cuts foreced on employees by the Judge. However, at that time they can also ask for MORE than they originally asked for....and often do (IAM at UAL).
As for the pensions, it is a difficult problem to overcome due to ERISA, which (perversely) was intended to protect the pensions of employees from corporate raiders and malcontents. It has done exactly the opposite and US Congress has been too myopic to change it. Clearly, the Bush Administration has declared war on its own citizens by having a clearly stated objective to rid US industry of Defined Benefit Plans.
Defined Beneft Plans are the type of pensions that set aside a percentage of your pay for an annuity type retirement payment. They are VERY different from Defined Contribution Plans, which are monies, such as 401(k) plans, that are deposited in the mployees name with an investment firm, and are managed by the individual. DC Plans are entirely OUT of the hands of the company as soon as they are paid. They are usually a defined percentaged of payroll for the individual (e.g. $10,000 per month pay cheque would produce $1,000 deposit in investment account, if DC Plan was a 10% plan).
DB Plans, on the other hand, have funding requirements established by ERISA and the IRS. They allow a company to NOT fund the pension as long as it maintains its funding to a set percentage, usually 80%, of expected liabilities. It is the calculation of the liabilities and assets that creates the problems, and the willingness of the US Government to allow companies to NOT fully fund their plans, that has led to the dire problems.
DB Plans have what is called a 5 yr smoothing, such that any peaks or troughs in investment returns are smoothed out so as to avoid large payment requirements by companies when the markets are negative. On the surface, this makes sense, as companies can LEAST afford to pay large pension payments to the Plans when the economy is trending downwards. However, no-one foresaw such a lengthy downturn and companies willingness to ONLY fund at the minimum levels during economic difficulties.
In essence, the laws allowed companies to provide minimal funding, then, as liabilities increased, to STILL not fund the plans even to minimum levels, under what was erroneously termed Deficit Reduction Contribution Relief. WHat this allowed companies to do was not even pay the minimum and allow their pensions to become even higher out of balance. Assets decreased while liabilities, which are tied to employee longevity, continued to increase.
Therefore, as soon as a company sought Chapter 11 protection, the pensions were immediately on the chopping black. They require CASH infusions and bankruptcy in the US is all about conserving cash by not paying your debts in full. Thereafter, banks express an unwillingness to provide bankruptcy exit financing until the pension liabilities are wiped clean, so companies merely turn their pensions over to the PBGC.
The PBGC is a Quango that provides "insurance" coverage for pensions. However, they are becoming INCREASINGLY irritated by companies seeking Chapter 11 protection almost SOLELY to unload their pension obligations.
The maximum DB Plan benefit is somewhere in the region of $120,000 per year, whereas the maximum PBGC payout for a pilot who is foreced to retire at Age 60 is $29,000. Therein lies the rub for ALL employees who spent decades accruing this pension benefit only to have it snatched from before their eyes by mgmts who see it as merely another liability....regardless of the fact that this liability had been paid for in the collective bargaining process.
After all, just as Glenn Tilton said about his and his management teams contracts when asked if they were going to take large cuts, "A contract is a contract!" Unless of course you are considered "labor."
Hope that helps,
cityfan