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
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
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
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
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
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 •
Liz Fedor •