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.