Pension experts hope PBGC 'creativity' doesn't go too far

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Restructuring: Sanford Rich is leading a PBGC unit that will seek alternatives to pension plan terminations.

PBGC Director Joshua Gotbaum got credit for creatively dealing with American Airlines to preserve its defined benefit pension plans during Chapter 11 bankruptcy, but corporate pension fund executives are hoping he doesn't get too creative as he reinvents his agency.

Mr. Gotbaum signaled a new approach for protecting pension plans during periods of corporate change and upheaval by bringing in restructuring expert Sanford Rich in mid-November to head the Pension Benefit Guaranty Corp.'s office of negotiations and restructuring.

Mr. Rich and his team — formerly part of the more innocuous-sounding insurance program — plan more active engagement with the business community, detecting potential risks to pension plans or offering alternatives to termination for plans already in distress. “We want to show companies there are other options,” Mr. Gotbaum said in an interview.

That is “a good first step,” said Aliya Wong, executive director of retirement policy for the U.S. Chamber of Commerce in Washington. “The chamber has long advocated that the PBGC should have a more active role in encouraging employers to maintain defined benefit plans. Hopefully, this restructuring will further that goal.”

Exhibit A in the agency's new approach is American Airlines, whose parent company AMR Corp. entered Chapter 11 bankruptcy protection in November 2011 and told employees a few months later that it had no choice but to terminate its four defined benefit plans — for flight attendants, agents, ground crew and pilots — as part of an effort to cut annual costs by $2 billion.

Taking control of the four plans would have saddled the PBGC with $18.5 billion in liabilities and just $8.3 billion in assets, creating a $10.2 billion deficit. With PBGC benefit limits capped at $9 billion, that would have left $1 billion unpaid.

That potential $9 billion claim would have been the largest in PBGC history, right behind the $7.4 billion in pension claims added from United Airlines after its 2005 exit from Chapter 11 bankruptcy. An American termination would have made the PBGC a major player on American's unsecured creditors' committee.

Mr. Gotbaum was the bankruptcy trustee for Hawaiian Airlines Inc. from 2003 to 2005 after the company filed for Chapter 11 reorganization. That experience prompted him and the PBGC to jockey early for a spot on American's creditors committee, where the PBGC gained access to company expenditures, pension contributions and restructuring plans.

Sitting across the negotiating table from the PBGC with Hawaiian Airlines gave Mr. Gotbaum an appreciation for both sides. “We want American Airlines to be able to reorganize successfully and succeed as a business, but we would like it to succeed as a business without killing its pension plans.” Mr. Gotbaum said at the time.

With American, the PBGC took both a carrot-and-stick approach to freezing rather than terminating the plans. The carrot was working with the company and the pilots union to legally shed the option of lump-sum payments, which the company feared would decimate its pilots' ranks.

“Some of the structural aspects of our pilots' defined benefit pension plan presented some real challenges for us,” said American Airlines spokesman Bruce Hicks. “The PBGC along with the Allied Pilots Association and the unsecured creditors committee put a lot of smart people on the job (and) we ultimately found solutions that worked for everyone, but we would not have been able to do so without PBGC's help.”

The stick was filing more than 70 liens against the foreign assets of AMR Corp., when the company paid just $6.5 million of a $100 million required pension contribution, arguing that it needed to preserve cash.

Mr. Gotbaum also wasn't shy about reminding members of Congress that they had given the company roughly $1 billion in pension funding rate relief in 2007, and that termination could leave taxpayers on the hook.

Credit for creativity

In fiscal 2012, the PBGC's bankruptcy activity kept $12 billion in unfunded liabilities off its balance sheet, largely due to its work with American Airlines, as well as $2 billion in fiscal 2011.

“I think he deserves a lot of credit for doing something this creative,” said Deborah Forbes, executive director of the Committee on Investment of Employee Benefit Assets, Bethesda, Md., whose members represent more than 115 of the largest corporate pension funds with $1.4 trillion in assets. But Ms. Forbes, a former PBGC attorney, and others would like Mr. Gotbaum to do more for healthy plans. “He needs to look for ways to help the ones that want to stay in the system,” she said.

Kent Mason, a benefits expert with Washington law firm Davis & Harman LLP, agreed. “Being creative in preserving plans in bankruptcy so they don't have to be terminated is a good thing. On the other hand, other forms of proactive actions have proved to be harmful.”

One of the biggest sore points among corporate plan executives is how the agency has used its authority under Section 4062(e) of ERISA to get involved when businesses expand or contract. Businesses complain that the agency goes beyond the law to maximize money for the pension plan without regard to the impact on the business overall and argue that it can be counterproductive if it discourages companies from continuing to sponsor DB plans.

PBGC officials disagree. “If we can see a developing problem, we should be interceding and influencing,” said Israel Goldowitz, PBGC chief counsel, in an interview. “It's getting to have a different perspective on what the risks are to the pension plan. If there is someone advocating for the employees, it does help (employers) focus.”

PBGC officials also monitor about 1,000 companies through its “early warning program,” which focuses on transactions that threaten an ongoing pension plan with liabilities above $25 million. Those transactions could include a change in ownership, leveraged buyouts or transfer of significantly underfunded pension liabilities during the sale of a business. If the PBGC senses a risk to its balance sheet, it can negotiate additional contributions, letters of credit or other financial guarantees.

Agency officials say the program has changed corporate behavior to the point where pension plans get more attention earlier in such transactions. In fiscal 2011, the review of 78 early warning transactions resulted in $195 million in added contributions to pension plans, including $100 million over five years from Motorola Solutions Inc., Schaumburg, Ill., for its $4.2 billion defined benefit plan.

Fiscal 2012, which ended Sept. 30, saw only 37 early warning investigations but far more Section 4062(e) settlements: 47 companies adding $471 million to their plans, vs. 40 settlements that netted $370 million in the previous year.

“We're looking for more creative ways to get companies to preserve their pension plans,” said Mr. Rich, who before joining the PBGC was a managing director at restructuring and financial advisory services firm Whitemarsh Capital Advisors LLC, New York. Previous stints in investment banking at Merrill Lynch & Co. Inc. and as a portfolio manager with GEM Capital LLC gave him some exposure to corporate pension funds, but he acknowledged in an interview that he has more to learn.

He is clear on his mission, though. “Our first goal is to protect the plans. To the extent that we fail in that, the first goal is to protect the pensioners.”

House Education and the Workforce Committee Chairman John Kline, R-Minn., said he will also be watching to make sure that sponsors aren't forgotten, said spokesman Brian Newell. “Chairman Kline supports efforts by PBGC that help ensure businesses going through bankruptcy keep the pension promises they've made. The committee will continue to closely monitor PBGC to make sure the agency uses its authority in a responsible way.”

This article originally appeared in the December 24, 2012 print issue as, "Pension experts hope PBGC "creativity' doesn't go too far".