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PBGC Urges Bankruptcy Priority for UAL Pension Contributions

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PBGC Urges Bankruptcy Priority for UAL Pension Contributions
December 13, 2004

WASHINGTON-The Pension Benefit Guaranty Corporation (PBGC) filed a brief in bankruptcy court Dec. 10 supporting a motion by United Airlines' independent pension fiduciary to compel the company to make more than $800 million in required contributions to its pension plans.

"United Airlines' pension debt is a legally binding obligation to its employees," said Executive Director Bradley Belt. "Just as companies in bankruptcy must continue to pay current wages to their workers, they must also pay for the deferred wages earned by employees."

United Airlines filed for Chapter 11 bankruptcy protection in December 2002. The company failed to make required contributions to its defined-benefit pension plans on July 15, Sept. 15, and Oct. 15, 2004, and owes the plans unpaid contributions of more than $800 million. The Employee Retirement Income Security Act (ERISA) requires United to continue funding its pension plans unless the plans are terminated or the IRS grants a waiver of the minimum funding requirements. In August the company and the U.S. Department of Labor agreed to appoint an independent fiduciary to oversee the interests of the pension plans, and on November 30 the fiduciary filed its motion seeking to give the unpaid contributions priority status as administrative expenses of the estate.

The PBGC brief emphasizes that under federal pension law unpaid pension contributions in excess of $1,000,000 are considered tax obligations and that pension obligations that come due after a bankruptcy filing have priority as administrative expenses. The entire amount of United's unpaid pension contributions therefore has priority as both a tax liability and an administrative expense. The PBGC also notes that United has not obtained court approval to modify its collective bargaining agreements with its unions and must honor the terms of those agreements, which require continued contributions to the pension plans.

United Air Lines sponsors four defined-benefit pension plans that cover almost 119,000 workers and retirees. The plans are 46 percent funded on a termination basis, with a total shortfall of $8.3 billion, according to PBGC estimates. If all four plans terminate, the loss to the pension insurance fund is estimated at $6.4 billion.

The PBGC is a federal corporation created under the Employee Retirement Income Security Act of 1974. It currently guarantees payment of basic pension benefits earned by 44 million American workers and retirees participating in over 31,000 private-sector defined benefit pension plans. The agency receives no funds from general tax revenues. Operations are financed largely by insurance premiums paid by companies that sponsor pension plans and by investment returns.

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