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Pension problems run deep

By Barbara Whelehan · Bankrate.com
Friday, December 2, 2011
Posted: 3 pm ET

No doubt you heard that American Airlines' parent company, AMR, filed for bankruptcy earlier this week. But is it true its underfunded pensions are the main reason behind the filing? That was the question raised in a story appearing on ai-cio.com, an industry publication for institutional investors.

It appears that the company is carrying too much cargo, in the form of pension obligations, in its fuselage. And those pensions may be terminated as the company goes through bankruptcy.

But that's OK, because private pensions are backstopped by the Pension Benefit Guaranty Corporation, right? Everyone will be made whole? They need not worry about retirement planning?

PBGC troubled

"When (bankruptcy) happens, employees and retirees worry -- and they should," said Josh Gotbaum,  PBGC corporation director, in a statement. "In past bankruptcies, workers and retirees have lost their healthcare and seen their pensions cut. Based on our estimates, American Airlines employees could lose a billion dollars in pension benefits if American terminates their plans."

That means some retirees' pension checks will be smaller than what they'd been promised. Pilots' plans in particular are in jeopardy. That's what happened with Delta's pilots a few years ago. In one case, when the PBGC assumed US Airways' pensions, a former pilot got $25,000 a year instead of the $75,000 he'd been promised, according to the Wall Street Journal.

The PBGC said it would have to pay out about $17 billion in benefits if AMR terminated its four plans, which cover about 130,000 people, including 69,000 active employees. The plans currently have $8.3 billion of assets but $18.5 billion in promised benefits.

But the PBGC itself is cash-strapped, having recently reported a deficit of $26 billion for fiscal year 2011 -- the largest in its history. It currently is responsible for about 1.5 million people in some 4,300 failed plans. It protects the benefits of 44 million Americans in 27,500 private-sector pension plans, according to a press release.

Private plan insurance

The PBGC doesn't rely on taxpayer dollars to pay benefits -- at least, not yet -- but rather on recovered plan assets plus insurance premiums paid by the plans. The premium it charges is $35 per covered employee -- which seems awfully cheap, if you ask me. Do you pay $35 a year for insurance that protects your retirement benefits? For that matter, do you pay $35 a year for insurance that protects anything?

But the PBGC's request for increases in premiums met with resistance by the retirement industry. Earlier this month, the ERISA Industry Committee, American Benefits Council, Business Roundtable and the U.S. Chamber of Commerce urged Congress to oppose the PBGC's proposal to raise the premiums, saying the agency's justification is based on incorrect information, according to Plansponsor.com.

The PBGC's troubles don't end there. Auditors claimed last week that the agency didn't properly oversee benefits accounting by outside vendors. "The result: Some beneficiaries from plans overtaken by the PBGC will have been overpaid, while others will have been underpaid," according to a report by ai-cio.com.

These problems suggest that when private pensions are headed for a crash landing, those in the control tower can't offer much assistance.

Tell me something -- do you work for a company in the private sector that offers a traditional pension? And do you think your retirement is secure?

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