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Financial Planning > Tax Planning

PBGC Lets U.S. Airways Kill DB Pension Plan

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NU Online News Service, March 28, 2003, 12:33 p.m. EST – The Pension Benefit Guaranty Corp. says it is approving efforts by U.S. Airways Group Inc., Arlington, Va., to replace its pilots’ defined-benefit pension plan with a defined-contribution pension plan.

U.S. Airways has filed for protection from creditors under Chapter 11 of the U.S. Bankruptcy Code. The company has asked a bankruptcy court to give it permission to terminate its existing pension plan.

The Air Line Pilots Association International, Alexandria, Va., argued in February that the matter should be resolved using the Railway Labor Act, which governs airline labor contracts, rather than through the bankruptcy court.

But the PBGC says the pilots association now acknowledges that U.S. Airways will not be in a position to set up a new defined-benefit plan before 2009.

The PBGC will be taking over obligations for the old, terminated U.S. Airways defined-benefit pension plan.

The PBGC emphasizes that it discourages employers from walking away from pension obligations by paying participants with bigger pensions less through the guarantee program than they would have received from the original pension plan.

If the combined benefits from the PBGC guarantee program and a new “follow-on” plan are comparable to the benefits from the original plan, the follow-on plan is abusive, the PBGC says.

“Without a follow-on policy, firms in severe financial distress could terminate their pension plans, transfer the obligations to the PBGC, and set up follow-on plans that build on PBGC’s guaranteed benefits to substantially replicate the old benefits,” the PBGC says in a statement about its ruling. “The result could be a flood of additional losses for the PBGC.”

The PBGC points out that it receives no general tax revenue and must fund its operations by imposing premiums on sponsors of defined-benefit pension plans.


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