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Topic: United Airlines ducks pension obligations
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josh
rabble-rouser
Babbler # 2938
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posted 12 May 2005 02:12 PM
From the Times article: quote: United Airlines won its bid to terminate its four employee pension plans this evening, clearing the way for the largest pension default in corporate history.The airline's unions denounced the decision by a federal bankruptcy court and vowed they could go on strike against United over the move. After a lengthy hearing in a Chicago courtroom packed with company employees and retirees, Judge Eugene Wedoff of the United States Bankruptcy Court sided with United in its contention that it could not emerge from bankruptcy protection with its pension plans in place. United has been operating in Chapter 11 bankruptcy since December 2002. The ruling potentially will save United billions of dollars a year in pension contributions. The airline plans to switch from conventional retirement programs, called defined benefit plans, to defined contribution programs like 401(k) plans
The last paragraph is what the Gropenfuhrer tried to do with CALPERS in California and, in effect, what Bush is trying to do with social security. At least in the U.S., both corporation and government have set out to screw the average worker in a glorified race to the bottom.
From: the twilight zone between the U.S. and Canada | Registered: Aug 2002
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rinne
rabble-rouser
Babbler # 9117
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posted 12 May 2005 04:24 PM
This is how I understand it. Pension plans are no longer protected by bankruptcy. This in turn makes bankruptcy a new business opportunity. Companies that have solid pension plans could be bought, run into the ground, and voila a new definition - bankcorruptcy.Repeating myself from another thread, big news in the US of A - terrorist alert, they run, big news - the need for social security reform, small news - pension fund. I just spoke with a friend in South Dakota and she hadn't heard much about this, only that United was talking about a strike. [ 12 May 2005: Message edited by: a citizen of winnipeg ]
From: prairies | Registered: May 2005
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jeff house
rabble-rouser
Babbler # 518
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posted 12 May 2005 04:30 PM
This is an example of a company ripping off its workers, and at the same time requiring the government to pick up most of the tab.There was a terrific analysis of this a few months ago in Harpers' Magazine; the reality is that MANY companies have fiddled their books, funding their pension funds with "expected growth" of 9%-10% per year. Of course, the growth never occurs; so the next year, they just write in an even more optimistic "expected rate".
quote: Such errors in judgment are seldom accidental. In pretending that their funds could generate high returns, managers sought a real—albeit short-term—advantage. The faster companies projected their funds to grow, the less they had to set aside to pay their retirees. The lower set-asides in turn allowed them to report higher earnings, thereby driving up the price of the company’s own stock to “create shareholder value.” Faced with a choice between living up to their pension promises or reporting higher net earnings, companies simply decided not to live up to their employee agreements.[5]
There is a government insurance fund in place which has to pay when these corporate plans fail, as they predictably will. But the Harper's article projects that the fund is way short of money too. Ultimately there will be a taxpayer bailout. But the stock price rose, and someone benefitted, for a long long time. http://www.harpers.org/The4.7TrillionPyramid.html
From: toronto | Registered: May 2001
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Dex
rabble-rouser
Babbler # 6764
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posted 12 May 2005 04:44 PM
Several other airlines have either done this already or are in the process of doing so. Look for GM and Ford to follow suit (one of them within the next 6-12 months). Front page of I think today's WSJ is an article showing that Toyota may pass GM as world's largest automaker by next year.Bottom line: this is just re-arranging the lifeboats on the Titanic. Most of the companies who do this are just delaying the inevitable. They are working with an outdated business model and unable/unwilling to face reality. Same goes for the automakers. As for the earlier assertion that employees will leave as a result, it ain't gonna happen. There aren't exactly a whole lot of jobs out there for people in the airline industry, not matter what your job or experience level. Those who leave will have to find work in another industry or not work at all. The only way this gets corrected is for the US to change regulations that not only requires firewalling pension funds, but also changes the regulations so that companies are not able to underfund their pensions or get out of them through bankruptcy. As despicable as it is, I lay most of the blame on legislators in this case. Fool me once, shame on you, fool me twice, shame on me. It's not like this is a new phenomenon. Politicians need to get off their duffs and do something about this.
From: ON then AB then IN now KS. Oh, how I long for a more lefterly location. | Registered: Aug 2004
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abnormal
rabble-rouser
Babbler # 1245
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posted 12 May 2005 09:19 PM
I think the situation is far worse than anyone here realizes. First, as others have commented, the rest of the airlines have to follow suit (either before or after they go bust). Secondly the auto companies can't be far behind. Never forget that the "Big Three" are not manufacturing concerns but are really retirement benefit plans that receive part of their financing from their auto manufacturing arms. That's why the UAW employs its own actuary.If you want chapter and verse about what went wrong I'll happily post tons of technical "stuff" but before I do so I'd suggest everyone read the MSNBC article "The End of Pensions". Note the absence of the word "a". By the way, before we go on, it's not just capitalist pigs that screw their employees. Bluntly, defined benefit plans are going the way of the dinosaur. And it's not just in the industies you'd expect. quote: May 3, 2005 (PLANSPONSOR.com) – Benefits accruals in the $2.5 billion defined benefit plan for Sears Roebuck & Co. will be cut off as of January 1, 2006 with workers getting coverage under a revamped 401(k) plan.Partly prompting the accrual change, according to a Sears spokesman quoted by Business Insurance, was that offering a defined benefit plan has become "an unacceptable risk" because of the volatility of the cash funding requirements. According to the Business Insurance report, competitive pressures also played a part in the move since few of Sears' competitors offering a defined benefit plan, making the provision of such a plan "competitively unsustainable," the unidentified spokesman said. Additionally, employees increasingly are interested in more-portable benefit programs such as 401(k) plans rather than traditional plans, the spokesman told Business Insurance. The latest move comes four months after a major pension plan change in which current workers 40 years old and older could choose between staying in the DB plan and a 401(k) program or opt instead for an enhanced K plan. New hires and those under age 40 had to migrate into the enhanced K plan. Under the 401(k) plan that Sears will offer next year to all eligible employees, the company will match 100% of employees' salary deferrals up to the first 3% of pay and 50% of employees’ pretax contributions on the next 2% of pay. Other major employers that have, over the past year or so, moved away from defined benefit plans include Motorola Inc., IBM Corp., NCR Corp. and Aon Corp.
By the way, the answers as to what went wrong with the UAL pension plan are far from simple. According to their Schedule B's at http://www.freeerisa.com/ the various plans had positive cash balances in 2002 that amounted to hundreds of millions of dollars. [If anyone understands Schedule B, please raise your hand - I do not.] It's probable that the plans still show positive cash balances even though they are some $9.5 billion in the hole.
From: far, far away | Registered: Aug 2001
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DrConway
rabble-rouser
Babbler # 490
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posted 13 May 2005 10:37 AM
Gosh, abnormal, you think maybe the loss of pensions is precisely due to the increasingly rightward drift of tax and labor law?NOOOOOOOOOO! CAN'T BE! It's just an anachronism we "can no longer afford!" We can afford this. Period. We just choose not to live up to our obligations.
From: You shall not side with the great against the powerless. | Registered: May 2001
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robbie_dee
rabble-rouser
Babbler # 195
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posted 13 May 2005 08:52 PM
The problem is that ownership does not necessarily equal control. The employees own the company through an ESOP, which is managed by a bank and the managers are legally bound to pursue the highest return to the trust fund, regardless of the cost in terms of jobs.You right-wingers might not like the source, but this exchange of letters on the World Socialist Web Site is somewhat helpful in explaining what is going on. If you want a rebuttal that explains why even in light of what's happened at United, not all employee ownership schemes suck, check out this link from Ownership Associates: "But What About United Airlines?" Answering Tough Questions About Employee Ownership. [ 13 May 2005: Message edited by: robbie_dee ]
From: Iron City | Registered: Apr 2001
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abnormal
rabble-rouser
Babbler # 1245
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posted 13 May 2005 09:03 PM
First, I've never said that United's actions were right. I simply said they were inevitable.Personally I think that the companies should honour the promises they've made. Catch is, they can't. It's that simple. They can't. And at some point the company becomes insolvent because liabilities (including unfunded pension amounts) exceed assets. When the companies made those promises they had no idea what they were signing onto. At the time, it looked like a cheap thing to do - grant your employees increased retirement benefits and it makes the union happy and has almost no impact on the bottom line. Sounds perfect, except for a few things. One of the reasons that increase doesn't show up on the bottom line is the insanely long amortization schedule that is applied to benefit improvements. In calculating the minimum contribution requirement, the cost of benefit improvements is amortized over a 30 year period. Thirty years! Neither the workers nor the management who negotiated the benefit improvement is still employed after 30 years, but the company is still paying for that benefit improvement. ERISA became effective for plan years that began after 12/31/1975. You do the math. In addition, many pension plans permit employees to receive their pension in a single lump sum payment. (Polaroid, which landed at the PBGC in 2002, paid lump sums. The airline plans allow payment of 1/2 of one's benefit as a lump sum.) When the company is experiencing financial difficulties and starts laying off employees, they apply for lump sum payments. By law, lump sum payments are calculated using a subsidized interest rate. The payment of lump sums depletes the plan's assets, reducing the funds available for workers who have not taken lump sum payments. Returning to the subject of credit balances the PBGC views the credit balance as "Public Enemy Number 1." United's credit balances were positive in 2002 and are likely still positive. If a company's credit balances are positive they don't have to make any contributions even though the plan may be underwater. (The same thing happened with most of the steel plans: they didn't have to make any contributions in the 4 or 5 years before plan termination because of their large credit balances.) An observation. Pension accounting is the stuff of nightmares. I had lunch with an actuary friend today and asked him to explain credit balances, Schedule B (see my earlier link), and related topics. An hour later I was sorry I'd ever asked the question. You want to measure the liabilities of a pension plan? The question reduces to what measure you want to use - he listed an easy dozen, all of which are "correct" in their own way but measure totally different things, virtually none of which are relevant to whether or not an employer can meet it's obligations. As an aside, United's deal with the PBGC may actually improve the condition of that entity. PBGC financials assume a certain level of defaults, which happened to include UAL's. However, it did not assume that it would receive the $1.5 billion contribution that UAL agreed to. By the way, the problem goes far beyond pensions. FASB 106 was introduced circa 1990 [FASB 106 required companies to accrue a liability for post retirement medical benefits (i.e., the cost of providing medical insurance to their employees after they retired).] At that time it was estimated that the liabilities of the Fortune 500 relating only to 106 exceeded the net worth of those same companies by a significant multiple.
From: far, far away | Registered: Aug 2001
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DrConway
rabble-rouser
Babbler # 490
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posted 14 May 2005 01:21 AM
quote: Originally posted by abnormal: First, I've never said that United's actions were right. I simply said they were inevitable.Personally I think that the companies should honour the promises they've made. Catch is, they can't. It's that simple. They can't. And at some point the company becomes insolvent because liabilities (including unfunded pension amounts) exceed assets.
Your defeatism on the subject is so heartwarming. The gist of your post seems to be that corporations have simply taken advantage of tax and accounting provisions that allowed them to escape, in the short term, seriously considering their obligations. Then when the bill has come due, they have cooked their own gooses. Sorry, but if they ran up this bill they should pay it, not scurry into bankruptcy court to stay all legal proceedings against them including the union pension fund suing them to get the money. I'm willing to believe you mean well but your previous defence of the morally indefensible maneuver of changing a pension plan from defined benefit to defined contribution as part of corporate plans to raid pension funds makes me wonder if you realize who's being ripped off around here.
From: You shall not side with the great against the powerless. | Registered: May 2001
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jeff house
rabble-rouser
Babbler # 518
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posted 15 May 2005 05:29 PM
quote: Personally I think that the companies should honour the promises they've made. Catch is, they can't. It's that simple.
No, it is not. Corporations overestimate their future prospects and profits, in order to make it appear that they have pension costs under control. The alternative would be to appear to be unprofitable, with the consecuences for share prices. And share prices have to go up, since executives make most of their money through stock options. It's a big scam, which is now coming into the open. The executives walked away with their stock-option money, and now the corporation "can't afford" pensions.
From: toronto | Registered: May 2001
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abnormal
rabble-rouser
Babbler # 1245
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posted 16 May 2005 07:48 PM
Originally posted by DrC quote: Your defeatism on the subject is so heartwarming.
Thank you, I think Please tell me how UAL can possibly fund its pensions. No doubt the company screwed up, big time by please tell me how the existing company is supposed to come up with several billion dollars to plug the hole. Taking advantage of accounting rules? In addition to minimum contributions (measured by the credit balance) there are maximum contributions defined in tax law. As I've said before, my guess is that UAL's credit balance is still positive and, even if they had the cash, the maximum they'd be allowed would be significantly less than the existing hole. Who do I blame? I've already commented on management that didn't understand what it was signing up for when it cut the various deals with the unions. They should have known and they should have thought about the long term implications. By the same token, the union executive should have thought things through as well. It doesn't so any good to cut a deal for your membership if the company will be unable to live up to its side. Big unions employ actuaries and, if they don't, there are plenty of consulting firms out there. They can't disclaim responsibility either. However, that just comes back to the question. How do you expect UAL to pay those pensions? On an unrelated note - stock prices are related to the market's perception of future profits, not the company's management.
From: far, far away | Registered: Aug 2001
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abnormal
rabble-rouser
Babbler # 1245
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posted 17 May 2005 08:26 PM
On an only somewhat related topic quote: EXPLAINING UAL PENSION TERMINATION'S EFFECT ON THE PBGC The Academy issued a fact sheet last week explaining that United Airlines' termination of its pension plan won't increase the Pension Benefit Guaranty Corp.'s deficit---and may help reduce it. The PBGC had already included United as a "probable termination" in its deficit projections. --fact sheet --Press Release
My personal prediction is that sufficiently many companies are going to dump into the PBGC that even the Feds are going to have to say enough is enough. It's worth noting that the American Academy of Actuaries has set up a consumer help facility on their website - right hand column. This is obviously intended for individuals covered by US plans but, at least for that group, it does provide access to a group that actually understands pensions.
From: far, far away | Registered: Aug 2001
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Américain Égalitaire
rabble-rouser
Babbler # 7911
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posted 17 May 2005 11:51 PM
quote: Originally posted by abnormal: Americain - hope your rant re "management types" extends to everyone that screws their employees.
Yes. Everyone. I have little love for a lot of the characters in big US labour as well. But you are confusing the issue with negotiations. Its not labour's job to discern what management can and cannot realistically provide. You show me one labour contract where management opened its books and really showed the union their financial state. It doesn't happen. The union takes their best guess and gets the best they can for their members. Its disingenuous to suggest that any union has the same financial data management has at their disposal and that they should refuse an offer that benefits their members. As for United, the problem as I see it is in bankruptcy law. When dissolving the airline, the pensioners and employees should come before the creditors and banks. Otherwise, the humane thing to do would be a government bailout of the pension system. You just can't let people waste away because their company screwed them after 30-40 years.
From: Chardon, Ohio USA | Registered: Jan 2005
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abnormal
rabble-rouser
Babbler # 1245
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posted 18 May 2005 08:39 PM
As an observation, the initial motion to take over UAL's pension plan came from the PBGC, not from the airline (Chapter 11 or not). As a point of fact, the PBGC attempted the takeover in December of last year and was rebuffed by the Company. That's when the PBGC went to court to force things.ERISA gives the PBGC the authority to take over a company's pension plans when doing so will limit the PBGC's future liability. That's why the PBGC acted when it did, as opposed to waiting several more months or years. If the PBGC waited the participants would have continued to accrue additional benefits. In addition, benefit improvements adopted during the past 5 years would continue to "phase in." * The workers and their unions have threatened to sue, but the USW sued a few years ago when the PBGC stepped in and terminated the steel plans. The courts repeatedly affirmed the PBGC's right to limit its future losses. * As they head into bankruptcy, many businesses negotiate tremendous benefit increases in lieu of pay increases. One of the steel companies whose plans were terminated by the PBGC had raised its benefit rate from $35 per year of service to $75.
From: far, far away | Registered: Aug 2001
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