[UPDATED] American Airlines’ bankruptcy – what does it mean for its pensions?

[UPDATED] American Airlines’ bankruptcy – what does it mean for its pensions?

No doubt you’ve heard that American Airlines has filed for bankruptcy. The airline has four underfunded pension plans, and their fate is the source of much speculation. Despite meetings the company has held with employees to discuss their pensions, workers remain concerned. Will the company terminate the plans and dump their liabilities onto the Pension Benefit Guaranty Corporation?

In a statement about the bankruptcy, the PBGC said,

American Airlines sponsors four traditional pension plans that cover almost 130,000 participants. As of today, the plans collectively had about $8.3 billion in assets to cover about $18.5 billion in benefits. If American Airlines were to end their plans, the agency would be responsible for paying about $17 billion in benefits; about $1 billion in benefits would be lost.

UPDATE, Dec. 16:  Josh Gotbaum, director of the PBGC, released a strong statement supporting traditional pensions in reaction to remarks made by American Airlines Counsel Harvey Miller.

While no announcement has been made yet about what might happen to the pension plans, it’s important that American Airlines employees and retirees be aware of what could happen if the PBGC takes over the plans. Here are some points to consider: 

• The PBGC states that “about $1 billion in benefits would be lost,” because the agency has limits on the amount of benefits it will pay. These limits would mostly affect those taking early retirement and higher-paid employees, such as pilots who have been with the company for a long time. Most employees and retirees would get the full benefits they had earned at the time of the plan’s termination.
• The Pension Protection Act of 2006 allows the PBGC to back-date a plan’s termination to the date that the company filed for bankruptcy. This means that, even if the plans don’t actually terminate until 2012 or later, the 2011 guarantee limits will still apply, since the company filed for bankruptcy in 2011.

Also, this means that time spent working for the company between the bankruptcy filing and the plan termination won’t count towards an employee’s service when calculating the pension benefit. For someone who is close to achieving the required age and years of service for special early retirement benefits, a few months could mean the difference between getting a full pension or having to take a much-reduced early retirement benefit.

• The PBGC has this helpful FAQ for workers and retirees whose plans it has taken over or might take over, and the Department of Labor has a fact sheet on how a company’s bankruptcy might affect employee benefits.

The Pension Rights Center has long been concerned about the treatment of pension plan participants in bankruptcy and the ability of companies to file for bankruptcy and abandon their pension plans. In 2008, we testified before a U.S. House of Representatives subcommittee in support of a bill that would increase protections for workers and retirees when companies file for bankruptcy. And our Consumer Agenda for Retirement Security includes a provision that addresses these concerns.

In related news, last month, the PBGC’s Office of the Inspector General issued a report, stating that the PBGC mismanaged the takeover of United Airlines’ pension plans. Apparently, many retirees’ benefits were miscalculated, resulting in either underpayment or overpayment.

The PBGC says that it is taking steps to correct these errors. However, everyone with a pension should be aware that benefit miscalculations often happen, whether it’s by the PBGC or the employer itself. Recoupment — when a pension plan realizes that it has been overpaying a retiree and demands repayment – is problem that we frequently hear about. Fortunately, there are limits to the amount that the PBGC can recoup at one time. 

As the American Airlines bankruptcy proceeds, we’ll keep an eye on what’s happening to the company’s pensions. In the meantime, remember that the Pension Counseling and Information Projects can help workers, retirees, and their families understand their legal rights when it comes to pensions. The South Central Pension Rights Project is located in Texas, where American Airlines is headquartered, and there are pension counseling projects that cover California and New York, where two of American’s major hubs are located. Check out the complete list of pension counseling projects to see if you are covered by one.