What the AMR Bankruptcy Means to American Airlines Pension Plans

American Airlines employees could lose a billion dollars in pension benefits if American terminates their pension plans as a result of the company’s November 29, 2011 bankruptcy filing, based on estimates by the Pension Benefit Guaranty Corporation (PBGC).

American Airlines Workforce

As of December 31, 2010, American Airlines had 73,401 employees, while its American Eagle subsidiary maintained a workforce of 13,601. Employee groups include pilots, flight attendants, mechanics and dispatchers, airport agents, reservations representatives, management, and support staff.

American Airlines Pension Plan Participants

American Airlines sponsors four traditional pension plans that cover almost 130,000 participants, according to the PBGC. As of the time of the November bankruptcy filing, the plans collectively had about $8.3 billion in assets to cover $18.5 billion in benefits. If American Airlines were to end their plans, the PBGC would be responsible for paying about $17 billion in benefits.

Based on benefit formulas and high compensation levels, the employee group most at risk is the pilots.

American Airlines pilots who retired in the past were allowed to take a lump sum distribution of their pension benefits. Following the bankruptcy announcement, however, the company ruled that the lump sum payment will no longer be available to future retirees. A group of 300 AA pilots who retired in the Fall of 2011 are the last to qualify for a lump sum.

Existing retired AA pilots, particularly those who took the lump sum distribution (and most did), are likely to see less of an impact as a result of the bankruptcy. Pilots who retire in the future are at risk of greater financial loss as a result of the discontinued lump sum feature and the possibility of future benefit cuts.

Pension Plan Obligations during Bankruptcy

In a Chapter 11 bankruptcy, where the plan sponsor attempts to reorganize their liabilities and emerge from the bankruptcy in a stronger financial position, pension and health benefits may be protected by the courts. This protection typically comes in the form of PBGC coverage, which caps participant payments in accord with a strict schedule (see below).

Other airlines, including United, Delta, and US Airways, dropped their pensions during a bankruptcy, costing the PBGC more than $11 billion.

In FY 2010, the PBGC worked closely with the bankruptcy courts and plan sponsors to help more than 30 plans survive Chapter 11 corporate bankruptcies. Despite these PBGC efforts, 147 underfunded single-employer, defined benefit plans did terminate in FY 2010, most often in bankruptcy. When this happens, the PBGC takes over responsibility for benefits payments to terminated plan participants.

Retiree Medical Benefits for American Airlines Plan Participants

Typically, retiree medical plans and other retiree medical liabilities under FAS 106 (Employers’ Accounting for Postretirement Benefits Other Than Pensions) are discharged in bankruptcy. Even if existing medical plans established to cover future retiree health care needs survive, it is likely that plan participants will lose any employer-paid premium contribution. Unlike pension benefits, retiree medical plans do not vest and are not guaranteed to current and future retirees even when bankruptcy is not a factor.

Similar to a COBRA plan, participants may be presented with the choice to continue their retiree medical plans only if they assume full payment of all premiums. This option is frequently not viable for retirees on a fixed budget, particularly given the cost of health care premiums.

PBGC Single Employer Plan Payment Schedules

As we have written about in earlier articles, the PBGC only pays annuities. The 2011 maximum guarantee for a single employer defined benefit plan with no survivor benefits is as follows:

– $4,500 per month or $54,000 annually at age 65

– $3,500 per month or $42,660 annually at age 62

– $2,025 per month or $24,300 annually at age 55

If a 45 year old participant’s private defined benefit plan is taken over this year, for example, and they plan to retire in 2021 at age 55, the 2011 guarantee level outlined above applies. Equally important, benefit payments are subject to vesting schedules and other qualifying factors outlined in the Summary Plan Description (SPD). Many participants may find that their individual payment is less than the maximum allowed.

The PBGC only honors the early retirement features of a plan for participants who meet all of the plan’s early retirement rules at the time it takes control. For example, if a plan’s early retirement option requires age 55 and 20 years of service, participants who have the 20 years, but are not age 55 when the plan is taken over must wait until the plan’s “normal retirement age” (typically 65) to commence benefits.

An American Airlines pension plan termination would further weaken the financial condition of PBGC, which has a record $26 billion deficit as a result of failed pension plans the agency has already assumed.

Future Outlook for American Airlines Pension Plan Participants

It is too early to predict the ultimate outcome for participants in the four American Airlines pension plans. What is known is that pilots who retire in the future have lost the benefit of a lump sum pension distribution. If the PBGC does take over the pension plans (which may not be known for 12-18 months), middle-aged workers who plan to continue their AA employment through retirement will see their future monthly pension payments capped at PBGC authorization levels as of the year the plan is transferred.

Popular trends among plan sponsors faced with the need to cut costs include replacing defined benefit plans with defined contribution plans, such as a 401(k) plan. At this point AA pension plan participants should follow news updates provided by the company and their plan administrator.