On the morning after United Airlines won the right to walk away from his pension, Jerry Jedynak woke up groggy and depressed. "Imagine being with a...
NEW YORK — On the morning after United Airlines won the right to walk away from his pension, Jerry Jedynak woke up groggy and depressed.
“Imagine being with a woman for 31 years and having that relationship shattered one day to find out you’ve been lied to and cheated,” said Jedynak, a customer-service agent at Chicago’s O’Hare International Airport since 1974. “You’re going to ask yourself, were you a fool? Why didn’t I see it coming?”
Jedynak and his co-workers at United aren’t the first to feel betrayed. First in steel, now in airlines, tens of thousands of workers and retirees counting on promised pension checks have watched troubled companies turn over the responsibility for underfunded benefit plans to the federal government.
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Underscoring the urgency of its effort was the carrier’s announcement yesterday of its biggest quarterly loss in two years, a $1.1 billion deficit for the first three months of 2005. UAL Corp., United’s parent, has lost $5.8 billion since entering bankruptcy in December 2002.
The dilemma now confronting United workers after a ruling Tuesday by a federal bankruptcy judge could be repeated at other airlines, and there are growing worries about underfunded retirement plans maintained by auto and auto-parts makers.
But for most other workers, the more likely threat is that their healthy companies with relatively sound pension plans will end them and freeze benefits — often as part of a switch to a 401(k) plan. It’s a route already taken by IBM, Avaya and hundreds of other employers.
That change, long in the making and increasingly widespread, is chipping away at long-standing expectations about retirement, even as lawmakers debate what to do about Social Security.
“Yesterday’s ruling is a real landmark, not only for these industries, but for American culture,” said William Rochelle, a New York corporate bankruptcy attorney. “What we have in politics and business today is an assault on the well-being of retirees.”
The demise of pension plans has accelerated over the past decade, as companies increasingly shifted away from the expense and unpredictability of traditional retirement plans and moved to 401(k)s and other defined-contribution plans.
The federal government’s Pension Benefit Guaranty Corp. has seen the number of traditional pension plans it insures drops from a peak of about 114,000 in 1985 to about 31,000 last year. The number of people covered by those plans remains stable, but the balance has shifted dramatically.
In 1985, there were 3 ½ active workers for every retiree covered by a plan. Today, the numbers are equal, reflecting that employers have eliminated plans for many of their new workers, and are coping with obligations owed to longer-living retirees.
Situations like the one at United reflect a somewhat different dynamic. It began in the steel industry in the 1990s, as companies staggering under global competition sought to restructure and free themselves of retirement obligations, often mandated in union contracts. One after another, companies like LTV and Bethlehem Steel jettisoned their pension plans under the protection of a bankruptcy court, turning them over to the PBGC.
The government agency makes good on many smaller pension checks. But caps benefits, limiting payout to formerly high-paid workers who were expecting larger pension checks and freezing the accrual of new benefits to workers still years away from retirement.
That progression has continued in the airline industry, with a bankruptcy judge’s permission for US Airways Group to turn its pension plans over to the government. With United dumping its obligations, the pressure grows on other established carriers to follow suit. Indeed, Delta Air Lines warned this week that it may seek bankruptcy protection.
Pension-industry experts are reluctant to predict whether other companies or industries might follow suit. But most acknowledge they are watching General Motors and Ford Motor — both of whose bond rating were downgraded to junk status last week by Standard & Poor’s.
“We’re getting a little nervous about the auto parts and auto industries,” said Ron Gebhardtsbauer, a pension fellow at the American Academy of Actuaries.
The UAL pension obligations are 80 percent larger than what had been the largest unfunded pension in the system, the $3.7 billion from bankrupt Bethlehem Steel.
The PBGC, a product of the Employment Retirement Income Security Act of 1974, was enacted to protect the pensions of factory workers and others who earned modest incomes. But when combined with bankruptcy laws, the pension-insurance system can be used for the benefit of corporations and investors.
Most recently, New York investor Wilbur Ross bought five bankrupt steel companies between 2002 and 2004, including Bethlehem Steel. Those companies shed $6.4 billion in unfunded pension liabilities on the PBGC before Ross bought them.
In April, Ross sold his International Steel Group for a $260 million profit to a European company, in large part because the government had assumed the cost of paying the pensions for about 190,000 retirees and current employees.
Among the proposed reforms is one measure that would prevent companies with weak credit ratings — so-called junk-bond ratings — from boosting pension benefits. The reform package also would substantially increase premiums companies pay for PBGC insurance.
“Our studies have show that there’s a very high correlation between a junk-bond status and the termination of an underfunded pension plan,” said Jeffrey Speicher, a spokesman for the PBGC.
But James Hendricks, a senior partner at the law firm Fisher & Phillips in Chicago, argues that companies outside of the airline industry will have a much harder time terminating their pension obligations.
Airline workers are hemmed in, he said, by the Railway Labor Act, which says they cannot go on strike without first going through mediation, and by the fact that even threatening a strike could worsen their situation if nervous travelers started booking flights on other airlines.
Workers in other industries have more leverage, Hendricks said. “They could say, ‘Well, if you want to mess with our pension plan, we’re going to strike.’ ”
That doesn’t mean other companies won’t exit their pension plans. But that will likely happen at strong companies, observers say. Employers are free to end a pension plan at any time, as long as they make good on benefits already earned.
Many companies have already made that move, citing the double-whammy of plummeting stocks and low-interest rates in the early part of this decade as making it too difficult for them to predict and pay for their future pension obligations.
“It is the unpredictability of the future, more than the actual costs, that is driving more companies out of the defined benefit system, and it is the fact that we might lose these well-funded plans that ought to be raising people’s concerns,” said James Klein, president of the American Benefits Council, which represents firms that operate the largest pension plans.
Information from Knight Ridder Newspapers is included in this report.