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News & Policy

PBGC Will Not Object to "Follow-On" Pension Plan for US Airways Pilots

March 28, 2003

The Pension Benefit Guaranty Corporation (PBGC) will not object to the defined-contribution pension arrangement that US Airways will set up for pilots whose defined-benefit plan the company intends to terminate. Consistent with the bankruptcy court's earlier decision, the PBGC also approved US Airways' application for a distress termination of the pilots' pension plan.

The "follow-on" pension proposal, agreed to by US Airways and its pilots union, consists of a tax-qualified basic defined-contribution plan and a supplemental, non-qualified defined-contribution plan. The PBGC's decision not to object is part of an agreement with the company and the pilots union that between now and the end of 2008 the benefits and contributions under the new defined-contribution arrangement will not be increased and no new defined-benefit plan will be created.

When an underfunded pension plan is terminated and taken over by the PBGC, the agency reviews any proposed "follow-on" plan to determine whether it constitutes an abuse of the pension insurance system. If the combined benefits of the follow-on plan and PBGC's guaranteed amounts produce substantially the same benefits as the original plan, the follow-on plan is deemed abusive. The Supreme Court endorsed PBGC's follow-on policy in its 1990 decision in the LTV Steel case.

"The PBGC's policy against abusive follow-on plans is crucial to preserving the financial integrity of the pension insurance system," said Executive Director Steven A. Kandarian.

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. Participants might not object if their combined benefits were substantially the same as under the old plan, and companies would have far lower pension costs going forward. The result could be a flood of additional losses for the PBGC.

After recording a $7.7 billion surplus at the end of fiscal year 2001, the PBGC slid into a deficit of $3.6 billion at the end of fiscal year 2002, mostly due to the termination of several very large and highly underfunded pension plans. The $3.6 billion figure does not include losses for any airline company pension plans, which are estimated to be underfunded by more than $18 billion industry-wide. Losses suffered by the insurance program must be covered by premiums paid by other companies that sponsor defined benefit pension plans. The PBGC receives no general tax revenue and is not backed by the full faith and credit of the U.S. government.

A federal corporation created under the Employee Retirement Income Security Act of 1974, the PBGC currently guarantees payment of basic pension benefits earned by 44 million American workers and retirees in about 32,500 private-sector defined benefit pension plans.

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PBGC No. 03-30