Most American Airlines employees can breathe a sigh of relief (sort of), now that the company has announced that it would not seek to terminate three out of four of its pension plans as part of its bankruptcy reorganization. Rather, the company will freeze those plans, meaning that employees will stop earning benefits after a certain date.
While freezing a pension plan is rarely a good thing for employees, certainly it is better than terminating a plan. With a freeze, at least the workers and retirees will get all of the benefits that they have earned up to the date of the freeze. Had American terminated the plans and dumped the obligations onto the Pension Benefit Guaranty Corporation, pension benefits would have been subject to the PBGC’s benefit limits, which likely would have resulted in pension cuts for higher-paid and longtime employees. A freeze also preserves special early retirement benefits – in a plan termination, pensions taken early are greatly reduced.
American has not yet decided what to do about its pilots’ pension plan. The company claims that the availability of lump-sum pension payouts in a freeze might spur too many pilots to take early retirement, causing personnel problems. Lump-sum payouts are not an option when a plan is terminated, and, as one of the higher paid groups of employees at the airline, pilots probably stand to lose the most in benefits in a termination. American says that it will work with the pilots’ union and the PBGC to work out a solution. (Read our fact sheet on lump sums vs. annuities.)
It should be noted that American Airlines likely would have terminated all of its pension plans, had it not been for the strong stand that the Pension Benefit Guaranty Corporation (PBGC) and the unions took in opposing termination. No doubt they were concerned about American following the bad example set by United Airlines, which dumped its pension obligations in 2005 after filing for bankruptcy. The move saddled the PBGC with its largest plan termination to date and forced many employees to take pension cuts. To add insult to injury, United executives received bonuses and stock options worth millions soon after the company emerged from bankruptcy.
Last Friday, PBGC Director Joshua Gotbaum used American Airliness as the jumping-off point for a terrific op-ed on the larger issue of retirement security. In the piece, Gotbaum makes excellent points about the importance of traditional pensions and Social Security, the drawbacks of 401(k) plans, and why working longer isn’t always realistic. I liked this observation in particular:
Retirement shouldn’t be a race to the bottom. Unfortunately, some of those without good pensions think other people should lose theirs. “Beggar thy neighbor” is not a way to make us more secure.
Instead of envying those with some security, we should be developing new options — options for employers and employees to share responsibility for saving and to reduce the administrative and marketing costs of retirement plans.
Coming up with new ideas for pension plans is of course the goal of Retirement USA. It was also the topic of our recent Re-Imagining Pensions conference, where Gotbaum was a participant. For more information about the conference and to watch videos of the discussions, visit the conference webpage.