United Airlines to stop paying into Pension plans

United Airlines said it would not contribute to its employee pension plans while it remains under bankruptcy protection. That move could save it more than a billion dollars in cash over the coming year, but pension experts said it signaled the likelihood that United would terminate some or all of the plans.

A full-blown default by United on all four of its pension plans would send tens of thousands of current and future retirees, and billions of dollars in unfunded obligations, to the government’s pension insurance program, dealing the program its biggest blow since the government began insuring pensions in 1974. Such a huge default could also set off a chain reaction, prompting other airlines to reduce their own costly pension plans to stay competitive. That, in turn, would worsen the pension agency’s finances.

But the rare and drastic measure would also make United much more attractive to the lenders it needs for the financing to help it emerge from bankruptcy. United filed for bankruptcy in December 2002, but said last week that its cost cutting plans would enable it to organise its funds to exit bankruptcy.

Terminating a pension plan is a drastic measure that requires approval of the bankruptcy court. In a so-called distress termination, the government takes over the failed pension plan’s assets and liabilities and uses the money to pay benefits to the retirees, within certain limits. When there are not enough assets in the plan to cover the obligations, the government’s insurance program, the Pension Benefit Guaranty Corporation (PBGC), makes up the difference. Retirees whose benefits exceed those limits would lose some of them.

The company’s workers can also try to block such a termination, either in court or by striking. But success could also be failure, because they could drive the company into liquidation, leaving themselves with neither a pension plan nor jobs.

The PBGC has demanded to know what United’s plans for its scheme are, it may have to pick up the estimated $5bn (£3bn) tab for the airline’s benefits. However, PBGC claims any such plans are contrary to US federal law.

United told a bankruptcy court judge that it plans to put off a $404m pension contribution in September and a $9m contribution in October. The announcement came a week after it had deferred a $72m pension payment.

The pension plan covers around 120,000 active and retired employees who are owed around $4.1bn over the next five years.

Unions have been angered by the proposal as they fear the carrier may scrap its retirement plans altogether to lower costs and attract badly needed investors.

In late June the company tried and failed to win a $1bn handout from the US government.

And earlier this month it increased some of its fares by 5% after a surge in crude oil prices raised fuel costs.