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Countering the Retirement Crisis

It's not enough to expect workers to delay retirement as a way to stretch out their savings, says the head of the PBGC -- because they already are delaying retirement. Josh Gotbaum says his agency not only protects workers from losing assets because of failing pension plans, but also works with companies to maintain their voluntary private plans.

Thursday, May 10, 2012
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To help counter the growing retirement crisis for today's workers, the Pension Benefit Guaranty Corp. has recently begun to spotlight its often-unnoticed mission "to encourage and preserve retirement plans of U.S. companies."

One of the ways the agency does that, said Josh Gotbaum, director of the agency, at a recent appearance before the National Press Club, is by advocating for employer-sponsored retirement savings.

That's what it did recently by working with AMR Corp. of Fort Worth, Texas, the parent of American Airlines, to convince the airline to freeze, instead of terminate, its traditional pension plans covering 130,000 workers and retirees, as part of its bankruptcy proceedings.

In February, AMR announced it planned to replace those plans with 401(k) plans offering an employer match for employee contributions.

PBGC, however, was not convinced that AMR needed to terminate its pension plans in order to emerge from bankruptcy, Gotbaum said.

Unions -- such as the Transport Workers Union and Air Line Pilots Association for employees of both American Airlines and American Eagle, another AMR carrier -- were also opposed to the plan's termination.

The challenge for the PBGC was to see if it was possible to balance the goals of American becoming a viable company after it emerged from bankruptcy, while keeping the 84,000 full-time and part-time jobs for its existing workers and preserving the traditional benefit plans, Gotbaum said.

"The fact is that what PBGC did at American is what PBGC has done for decades," he said. "When a company is in bankruptcy, the job of the PBGC is to engage. It has done so for decades as a creditor."

"We are there to make sure, obviously, that the company survives. But, if at all possible, the pension plans can as well," he said. "There are plenty of other cases where we do that and we conclude that companies can't afford their plans.

PBGC's staff of "highly professional and experienced" financial analysts, lawyers and actuaries analyzed the company's ability to both preserve its plans and emerge from bankruptcy, according to Gotbaum and -- after conversations with PBGC and other creditors -- AMR announced on March 7 it had decided to freeze its plans instead of terminating them.

It was not an easy or cost-free decision for AMR. The company still needs to meet its $2 billion in cost savings, which includes cutting 13,000 jobs and trimming $1.25 billion in labor costs.

"Initially," says Bruce Hicks, a spokesman for AMR, "we believed we would have to terminate the plans because of the underfunded liability. While we recognized, to employees, a freeze was preferable to a termination, we felt we didn't have a choice."

If AMR had been forced to terminate rather than freeze, it would not have led to a lower benefit payout for 90 percent of AMR's workers, Hicks says.

It was able to change course, Hicks says, when the company received commitments from the bankruptcy creditors' committee that AMR would be allowed to raise additional capital to fund the pension liability.

With that promise, "it became possible to freeze for the non-pilot plans," says Hicks, noting there is a separate pension plan for airline pilots.

AMR still hopes to freeze -- instead of terminate -- the pilots' plan, but first must resolve a key issue, he says.

"The pilots plan has a provision that allows pilots to take a lump-sum payout. That poses for us substantial operational risk at the time we come out of bankruptcy," says Hicks.

"The pent-up demand, if pilots were to retire in large numbers because of incentives, [would mean that] we would not be able operate the airline," he says. "We have to have pilots. We have to be able to fly."

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American has also been in the news because of talk that U.S. Airways would like to merge with American after it emerges from bankruptcy. AMR Corp. Chief Executive Officer Tom Horton has said he wants American to remain independent and opposes the merger.

Although Gotbaum said PBGC's primary job is to be "a safety net" when companies can no longer afford their plans, he said the agency also strives to meet its statutory requirement to encourage and preserve plans.

"First, we try to preserve plans because people always feel more secure when their plans are intact. Our mandate, however, is broader than that," he said. "Under the law, we are charged with encouraging voluntary private plans."

His showcasing of the agency's pension-advocacy role is partially driven by what he sees as a growing retirement crisis for today's workers -- who are less prepared for retirement, but will live longer than retirees only a generation ago.

"Some folks will say all it takes is for people to work longer, for people to retire not so soon," Gotbaum said.

"Well, people already are working longer. From the mid-'90s to a few years ago, the average retirement age went up by two years. And that was before the market crash," he added.

"So, the fact is, people are working longer. But even though they are working longer, they are living longer still. And that means that in the future retirement is going to cost more, not less," he said. "Pensions that were enough in the past won't be in the future."

PBGC is currently paying benefits to about 1.5 million people in more than 4,300 failed plans. 

Last year the agency paid $458 million a month to 873,000 retirees, or about $5.5 billion. The agency also manages plans that cover 628,000 current and former workers who will be eligible to receive retirement benefits in the future.

Gotbaum reminded the press club that the agency is funded by premiums, not by taxpayers. Those premiums cover 44 million participants in 27,500 ongoing plans.

The agency's deficit, however, hit $26 billion last year -- the result of subtracting total liabilities of $107.7 billion from total assets of $80.7 billion.

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