American Airlines Inc. parent AMR Corp. has asked a federal bankruptcy court in New York for permission to allow the airline to amend its frozen pilots’ pension plan so retiring pilots cannot receive their accrued benefits as a lump sum.
If lump-sum payments were allowed, the result would be a significant increase in the number of pilots retiring, resulting in a pilot shortage, AMR said in its filing last week with the U.S. Bankruptcy Court in New York.
Under one scenario outlined by AMR, a 50-year-old pilot, for example, “may conclude that he or she can have the best of both worlds by retiring from American with a substantial lump sum while continuing to fly the most prestigious aircraft at a top salary for a foreign airline.”
A surge in retirements “would create a pilot shortage which, in turn, would result in an operational crisis involving the wholesale cancellation of flights and the grounding of airplanes, with a corresponding devastating reduction in revenue and profitability,” AMR said in its filing.
To prevent that from happening, American would be forced to seek bankruptcy court approval to terminate the plan, AMR said. That would shift liability to pay the plan’s promised but unfunded benefits from American to the Pension Benefit Guaranty Corp.
The bankruptcy court filing was part of a collaborative effort with the pilots’ union and the PBGC to maintain the freeze rather than having to terminate the plan, an American Airlines spokesman said.
The filing follows a final Internal Revenue Service regulation to allow employers in bankruptcy to remove lump-sum options as a way for plan participants to receive their accrued benefits.
While accrued benefits normally cannot be reduced or eliminated, the final IRS rule will allow “a debtor in a bankruptcy proceeding to amend its single-employer defined benefit plan to eliminate a single-sum distribution option” as long as certain conditions are satisfied. Those conditions include a determination by the judge overseeing the employer’s bankruptcy that the elimination of the lump-sum option is necessary to avoid termination of the employer’s pension plan.
American on Nov. 1 froze the pilots’ plan and three other plans which, unlike the pilots’ plan, do not offer a lump-sum option.
As long as parent company AMR remains in bankruptcy, American has not been required to offer lump-sum benefits to retiring pilots.
Jerry Geisel is editor-at-large at Business Insurance, a sister publication of Pensions & Investments.