AUSWR
The Association of U S West Retirees
 

 

 

NWA's pension hole:  So far, so fast
Northwest's plans have a shortfall of $5.7 billion, by one estimate.  The Labor Department is examining how the airline managed them.
Mike Meyers and Liz Fedor
Minneapolis Star Tribune
Thursday, March 16, 2006

By the time Northwest Airlines went into bankruptcy in September, the company's pension plans, fully funded as recently as 2000, were by one estimate $5.7 billion short of the money needed to keep their retirement promises.  How did the pension situation deteriorate so far, so fast?

Northwest, like many U.S. companies, made assumptions that the stock market would continue to provide solid returns and that interest rates would stay higher than proved to be the case.  A wave of retirements, many linked to the deep cuts in Northwest's workforce, also led to unanticipated claims even as the expected investment gains didn't materialize.

"The pension plans are underfunded now as the result of the confluence of various events over which Northwest had no control," Northwest officials said Wednesday.

But U.S. Department of Labor investigators aren't willing yet to say Northwest's management bears no blame.  The regulators are looking into whether Northwest chipped in far less than required to meet its retirement obligations.

In a statement, Northwest denied that the airline has "systematically shortchanged" its pension plans in recent years, the theme of a New York Times article Wednesday that included the news of the Labor Department probe.

"In fact, the pension plans were fully funded as of 2000, and since 2001 Northwest has contributed over $1.1 billion to its pension plans," the airline said.

Northwest made no mention of a $65 million pension-plan payment that was to have been made the day after it filed for bankruptcy.  However, the airline said management has made unspecified pension payments since beginning a Chapter 11 reorganization last fall.

Andrea Fischer Newman, Northwest's senior vice president of government relations, said in an interview that the Labor Department review "is a normal course of business" because the department has a responsibility to analyze the condition of pensions at bankrupt companies.

Newman said the airline and the department had a legal conflict over the release of documents, because the department at first refused to sign a confidentiality agreement that would cover records and plans that Northwest considers sensitive to its business position.  But the department decided Monday to sign a confidentiality pact, which Newman said is similar to the one signed months earlier by the Pension Benefit Guaranty Corp.

Newman noted that the Labor Department investigated United Airlines' pension plans and directed the carrier to appoint an independent fiduciary.  In Northwest's case, she said, the airline appointed an independent third party to look out for the interests of beneficiaries before the bankruptcy filing.

The PBGC, created by Congress as a backstop for corporate retirement plans, estimated that Northwest's pension shortfalls were $5.7 billion last fall.  Northwest put the deficit at less than $4 billion in 2004.

Northwest wants Congress to give it 20 years to fully fund its traditional pension plans.

In Northwest's interest

"If the pension legislation passes, the Northwest pensions clearly can be saved," Duane Woerth, president of the Air Line Pilots Association, said Wednesday.  "Clearly, it is in the interest of Northwest to save the plans" and avoid a "big fight with the PBGC," he said.

If Northwest cancels the plans, Woerth said, the PBGC could push to gain equity in the restructured company, something Northwest wants to avoid.

Mark Taylor, a national officer for the Aircraft Mechanics Fraternal Association, said he hopes that Northwest saves the pension plans.

"The jury is still out for me," the 25-year Northwest mechanic said.  "When I see the company come out of Chapter 11 with the pension plans intact, then I'm a believer."

However, Taylor added that Northwest still could dump the plans if it doesn't get the full 20 years it wants from Congress.  In doing so, Northwest would be following the example of United and US Airways, which both terminated their plans in bankruptcy.  Delta Air Lines, also in bankruptcy, has told its pilots that it may end its pension plans.

Northwest has frozen the pension plan of pilots at current levels, in an agreement with their union.  The airline also has tentative agreements to freeze the pension plans of flight attendants and ground employees.

Three different measures

The balance between assets and liabilities in any pension fund can be measured in three different ways, leading to widely different conclusions about the depth of red ink in an underfunded plan.  Financial reports that companies submit to the Securities and Exchange Commission, the Labor Department and the PBGC use different accounting standards.  What's more, pension plans can swing from surplus to loss in a short amount of time.

In 2000, a Northwest report to the Labor Department showed that its pension plan for about 51,000 union employees (excluding pilots) had assets of about $1.527 billion and liabilities of nearly $1.660 billion -- a $133 million shortfall.

By the end of 2004, the same pension fund had only a slight gain in assets -- $1.626 billion, but liabilities had soared to $2.9 billion, leaving the plan nearly $1.3 billion out of balance.

Part of the swelling shortfall could be explained by a wave of early retirements as Northwest pared wages, benefits and employees.  But declining interest rates played a part, as well, since lower interest rates mean lower returns on fund assets.  To make up for those lower returns, Northwest -- or any company with a defined-benefit pension plan -- has to contribute more to the plan.

When it comes to pension plans the size of Northwest's, a decline in estimated future interest rates of only three-quarters of a percentage point can force the firm to kick in an extra $500 million to $1 billion, by the estimate of Ron Gebhardtsbauer, senior pension fellow at the American Academy of Actuaries in Washington.

The turmoil, and associated retirements, at Northwest in recent years only exacerbated the issue.

"When will people retire?" he said.  "If you retire at a different date [than expected], that may be more expensive to the pension plan."

Mike Meyers meyers@startribune.com
Liz Fedor lfedor@startribune.com

http://www.startribune.com/535/story/310216.html