Northwest Airlines Corp.'s pension plans might soon own an airline - not NWA, but Pinnacle Airlines Inc., a subsidiary.
Northwest wants to contribute Pinnacle stock to the pension plans to satisfy a required $233 million contribution for 2002, due this year. This contribution would make Northwest's three underfunded pension plans the majority owners of Pinnacle, which has no public market for its stock.
The Department of Labor's Employee Benefits Security Administration faces a complex issue in ruling on Northwest's request for an exemption to make the contribution.
The contribution would represent between 54% and 81% of Pinnacle, according to NWA. A Northwest filing notes the pension plans ultimately could own nearly 100% of Pinnacle. But the plans will get to name only one of the six directors, leaving control of Pinnacle with Northwest.
Northwest anticipates having an initial public offering of Pinnacle in 2003 or 2004.
In deciding the fate of NWA's proposal, EBSA officials should keep in mind a related issue: To further preserve liquidity, Northwest is seeking a waiver from the Internal Revenue Service for $450 million in contributions it expects to be required for 2003, extending them over five years.
A hearing on the exemption proposal is set for May 5. No matter what the EBSA decides, participants' pensions will continue to be at severe risk. The Pinnacle contribution could postpone a reckoning for possibly only one year, as suggested by the IRS request.
The Northwest plans are severely underfunded, with $3.6 billion in assets and $7.6 billion in liabilities at the end of 2002. The EBSA should consider Northwest's long-term ability to sustain its pension plans.
No one suggested rejection of the exemption would lead to termination. But if a termination should follow at some later date, an exemption would saddle the Pension Benefit Guaranty Corp. with even more unfunded liabilities to its deteriorating funding status.
There are other complicating factors. The UAL Corp. bankruptcy proceedings raise the issue of a pension fund's control over its assets. Should Northwest or Pinnacle ever file for bankruptcy, the EBSA has to consider the implications of Northwest's pension funds being majority owner of a subsidiary stock. In the UAL case, bankruptcy law trumped pension law in terms of fiduciary control over company stock assets.
The EBSA needs to disregard these external complications and focus entirely on what is best to secure pensions. Will Pinnacle stock make the pension benefits of Northwest's employees more secure or less secure? Also, the EBSA ought to ask about the propriety of Pinnacle's corporate governance, if the pension plans are the majority owners.
To assuage concern about conflict of interest, Northwest hired Aon Fiduciary Counselors Inc. as independent fiduciary for the Pinnacle stock. Northwest granted a put option allowing Aon to sell back the Pinnacle stock to Northwest before the IPO. But could Northwest easily raise the cash for a put?
The only alternatives to the Pinnacle contribution may be cash - which Northwest implies it wants to preserve for liquidity - or contributing Northwest's own stock. But an EBSA official has said Northwest executives believe Pinnacle stock is worth more.
If EBSA allows the exemption, it should add a caveat: See you again next year. Until financial markets become favorable to pension plans, Northwest will have to look for new ways to pay future contributions, because it suggests it doesn't believe it will have the cash for years to come.
