This is a follow up memorandum to the memorandum I sent you several weeks ago, dealing with pension rights in bankruptcy. As with the previous memorandum, I am not dealing with individual situations, but only with general issues. In addition, I would note that many issues that have been raised have not been definitively resolved by Courts and, in all likelihood, we will have to wait for resolution of pending disputes in the USAirways and United bankruptcies to know with greater certainty the answers to a number of questions on pension rights in bankruptcy.
It is my understanding that members have called you inquiring as to whether they should retire quickly so as to a lock in of their pension benefits before a bankruptcy. Let me again attempt to clarify the relevant principles. Under a defined benefit pension plan, employees accrue vested pension benefits (normally the right to a monthly payment) based on service with the Company offering the plan. Such plans typically provide a vesting schedule. Once the employee earns vested benefits, under federal pension law, the benefits he or she has earned based on service rendered cannot be reduced. This is true whether the employee is already retired or still working.
In this respect, the fact that a Company declares bankruptcy does not automatically terminate or even change the terms of its pension or otherwise reduce benefits. It must either negotiate such changes or persuade a Bankruptcy Court to impose them after a hearing. Such changes S whether negotiated or imposed S must be consistent with the requirements of federal pension law and not even the Court can reduce the benefits our members have already earned.
To be sure, the Pension Benefit Guaranty Corporation the agency which insures defined benefit pensions may terminate a defined benefit plan if it determines the Company does not have the assets required to pay vested benefits of eligible employees upon retirement. At that point, the PBGC takes over administration of the Plan and pays benefits as they come due up to certain limits. The schedule of limits for year 2003 was reproduced in my previous memo. However, if the Plan is terminated and taken over by the PBGC, an employee who has earned benefits based on service rendered which exceed the PBGC guarantees could suffer a reduction in benefits. This is true regardless of whether the employee retires before or after the termination of the Plan.
It must also be noted that, as of this writing, there is a dispute between ALPA and USAirways which bears on this issue. USAirways is attempting to persuade the Bankruptcy Court to rule that it can terminate the pilot pension plan and have it taken over by the PBGC. ALPA appears to be arguing that, because such a ruling would have the effect of substantially reducing vested benefits in violation of ERISA as well as agreements it made with the Company in connection with its bankruptcy, the Court does not have the authority to make such a ruling. Notably, USAirways has informed the Court that if it cannot terminate the pilot pension plan, it will liquidate.
Aside from the above question, several other general issues have been raised:
1. Age 60 Retirement
In this last round of collective bargaining, we secured a provision for unreduced retirement at age 60. I do not know what concessions the Company may seek in bankruptcy, but it is certainly possible it may request that the Court rescind this benefit. If so, this reduction can only be imposed prospectively S that is, employees receiving or eligible for unreduced retirement at 60 prior to the time the benefit is rescinded by agreement or Court action would continue to be eligible. The point is, a retiree or employee approaching retirement cannot be deprived of benefits he or she has earned based on service already rendered and would not lose benefits because he or she was in active status.
By the same token, an employee who is only 59 or less when (and if) the Age 60 provision is changed would not be eligible for unreduced retirement. Rather, he or she would be entitled to whatever they had earned based on their service up to the point the Plan was changed and then would accrue further benefits based on whatever new formula was agreed to or imposed. Such an employee would also not lose benefits by continuing to work or being in active status.
As stated above, though, if the Plan is terminated and taken over by the PBGC, all benefits would be subject to the PBGC limits. Persons retiring before age 65 may well have vested benefits above these limits and, therefore, could suffer reductions. However, these reductions will be suffered by those who are already retired at the time of termination, as well as those who retire afterwards. Moreover, in that the PBGC guarantees increase each year of retirement up to age 65 (please refer back to the schedule of guarantees in my original memo) and are also adjusted yearly for inflation, the retirees pension will increase annually even if limited to PBGC guarantees. (Please also note that, as stated in the original memo, the PBGC does not fully guarantee plan improvements negotiated within five years of termination, but, rather, guarantees greater percentages of such improvements each year up until five years have elapsed)
2. Why and how could our defined benefit pension plans be terminated?
Employers can end (terminate) pension plans in one of two ways. In a Astandard termination,@ an employer ends a fully funded plan after showing PBGC (the government agency that insures and regulates pension plans) that there is enough money to pay all benefits. The plan provides the benefits owed to retirees and current employees by purchasing annuities from an insurance company. In a standard termination, PBGC does not take over the plan.
A Adistress termination@ occurs when an employer ends a plan that does not have enough money to pay all benefits that are owed. In order to do this, the Company must prove to PBGC that it does not have sufficient assets to support the plan B something PBGC investigates and questions. If the PBGC allows a distress termination, it takes over the plan and uses its own assets and any remaining assets in the plan to make sure that current and future retirees receive their vested pension benefits, up to maximum dollar amounts set by law and subject to other legal limits.
3. If the PBGC terminates the pension and takes over payment of benefits, will our members have the same options for receipt of benefits?
No. The choice of benefit forms PBGC would offer employees who retire after PBGC takes over the plan differs slightly from those available under the current plan. The PBGC offers employees the option to draw benefits in the following single-life forms:
(i) A straight-life annuity;
(ii) A 5-year certain-and-continuous annuity;
(iii) A 10-year certain-and-continuous annuity;
(iv) A 15-year certain-and-continuous annuity; and
(v) The form an unmarried person would be entitled to receive from the plan in the absence of an election.
The PBGC offers employees the option to draw benefits in the following joint-life forms:
(i) A joint-and-50%-survivor annuity;
(ii) A joint-and-50%-survivor-Apop-up annuity (i.e., where the participants benefit Apops up@ to the unreduced level if the beneficiary dies first);
(iii) A joint-and-75%-survivor annuity; and
(iv) A joint-and-100%-survivor annuity.
4. What happens to retiree medical if the Company declares bankruptcy?
As with pension, the fact that the Company declares bankruptcy does not change its obligation to pay retiree medical. This includes the supplemental coverage after age 65 which is available by virtue of prefunding. There are specific provisions in the Bankruptcy Code that the debtor must follow in order to get Court authorization to modify or end medical coverage for retirees. These requirements even apply to benefits not covered by a collective bargaining agreement. While I am not willing to predict exactly how a Court will approach such an issue, the fact that our members have significant equity in the retiree medical program by virtue of prefunding should be highly relevant to any Court which must, by statute, Abalance the equities in ruling on a request to modify the program.
Prefunding contributions made by employees along with employer matching contributions, and the earnings on all such contributions, are in trust. None of this money can revert back to the employer or its creditors. If the trust is maintained, the money can only be used for the retiree medical of TWU represented employees. If the trust is terminated (for example, in a liquidation), the employee contributions plus earnings (or the balance left of such contributions for retirees) must be returned, but the employer contributions plus earnings can only be used after the exclusive benefit of participating employees and retirees including Acontinuing retiree health coverage under an alternative program as may be agreed to by the parties.
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cc: Patricia Rice
