Agency Moves to Rescue Pension Plans at Pan Am : Bankruptcy: The bailout of the airline’s fund could cost the government $600 million, making it the biggest ever.
In what would be the largest federal bailout of a pension fund, the Pension Benefit Guaranty Corp., the agency that insures the payment of basic retirement benefits, moved Wednesday to take over two under-funded pension plans at bankrupt Pan American World Airways.
The bailout could cost as much as $600 million and will add to the agency’s sizable liabilities, which have ballooned in recent years from previous takeovers. Meanwhile, officials are increasingly concerned about other large, under-funded plans.
“Unfortunately, Pan Am is not our only concern,” James B. Lockhart III, executive director of the agency, told a news conference. “The airline industry is undergoing restructuring, and there are several other carriers whose under-funded pension liabilities are a concern. Also of concern is the substantial under-funding in the auto and steel industries.”
At the end of the year, the agency had assets of $3.3 billion, primarily from premi um payments by the 95,000 defined benefit pension plans covered by the agency. But its liabilities had mounted to $5.1 billion. The Pan Am takeover would be the agency’s biggest bailout in its 17-year history.
Pan Am filed for protection in bankruptcy court in January and is trying to sell its assets to pay off creditors. The pension takeover, which must be approved by a federal judge in New York, would make the agency Pan Am’s largest creditor.
The takeover may speed up the sale of Pan Am by mitigating the concerns of potential buyers over the pension liability, according to government officials. However, the agency stands to recover only a fraction of what it is owed.
Delta Air Lines, Trans World Airlines and United Airlines have proposed buying parts of Pan Am.
The two Pan Am pension funds, covering about 35,000 workers and retirees, are under-funded by $840 million. But only $600 million of those funds are guaranteed by the agency.
Lockhart said Pan Am began missing premium payments on its two funds last November and missed two more payments before the 1990 fiscal year closed at the end of June. Those missed payments totaled $280 million, said Andrew Gasparich, an agency official.
It was primarily because of that shortfall that the agency, expecting that the Pan Am pension funds would have to be taken over, included a chunk of the expected $600-million liability in the agency’s reported $1.8-billion deficit at the close of the 1990 fiscal year.
The overwhelming majority of the affected workers and retirees are enrolled in the airline’s cooperative retirement income plan. In that program, all retirees--11,000 of them--are entitled to specified benefits that are fully guaranteed by the pension agency, Gasparich explained.
But the 23,000 workers still on the airline payroll may not be so lucky. They could lose out on as much as $240 million in non-guaranteed benefits.
In addition, the 750 workers and retirees affected by the second plan, a defined benefit plan for flight engineers, may face reduced monthly benefits because their specified benefits exceed the pension agency’s maximum monthly benefit of $2,250. About 550 of the affected flight engineers are retired, and Lockhart cautioned that some of the younger retirees in particular may be affected.
A third Pan Am pension plan, covering about 2,300 pilots, is not affected by Wednesday’s decision, but pension agency officials are checking to see if it may also be under-funded.
“I want to assure the 35,000 workers and retirees that their pensions are safe,” Lockhart said in a statement Wednesday. “I especially want retirees to know that their monthly benefits will continue to be paid on time.”
Later Wednesday, Lockhart went to Capitol Hill, where he asked a Senate Judiciary subcommittee to make it easier for the agency to press claims in bankruptcy court.
“Our future is very uncertain,” he told the courts and administrative practice subcommittee, explaining that the agency’s deficit has virtually doubled in a year and “could exceed $11 billion in 10 years unless steps are taken now to prevent a continuing downward spiral.”
The spiraling deficits, he said, are caused primarily by a small group of recent mega-bankruptcies--Pan Am, Eastern Airlines, LTV Corp., Wheeling-Pittsburgh, Kaiser Steel and Allis-Chalmers--which alone have accounted for about $2 billion in liabilities.
Failed Pensions The largest pensions terminated by Pension Benefit Guaranty Corp.
Size Number Company (in millions) of plans Year Pan American Airlines* $840 2 1991 Eastern Airlines $700 7 1990 Wheeling-Pittsburgh Steel $498 7 1985 LTV $250 1 1986 Kaiser Steel $220 4 1987 Allis-Chalmers $175 11 1985
*Proposed termination
Source: PBGC
