Private Pensions: Airline Plans' Underfunding Illustrates Broader Problems with the Defined Benefit Pension System Page: 2 of 13
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Highlights of GAO-05-108T, a testimony
before the Committee on Commerce,
Science, and Transportation, United
Why GAO Did This Study
At the same time that "legacy"
airlines face tremendous
competitive pressures that are
contributing to a fundamental
restructuring of the airline
industry, they face the daunting
task of shoring up their
underfunded pension plans, which
currently are underfunded by an
estimated $31 billion. Terminating
these pension plans confronts
Congress with three policy issues.
The most visible is the financial
exposure of the Pension Benefit
Guaranty Corporation (PBGC), the
federal agency that insures private
pensions. The agency's single-
employer pension program already
faces a deficit of an estimated
$9.7 billion, and the airline plans
present a potential threat to the
agency's viability. Second, plan
participants and beneficiaries may
lose pension benefits due to limits
on PBGC guarantees. Finally,
airlines that terminate their plans
may gain a competitive advantage
because such terminations
effectively lower overall labor
This testimony addresses (1) the
situation the airlines are facing
today, (2) overall pension
developments, and (3) the policy
implications of addressing these
To view the full product, click on the link
above. For more information, contact Barbara
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Airline Plans' Underfunding Illustrates
Broader Problems with the Defined
Benefit Pension System
What GAO Found
The problems posed by the airlines' underfunded plans, while extremely serious
in the short term, are only the latest symptom of the decline in the health of our
nation's defined benefit (DB) pension system. These problems illustrate
weaknesses in the pension system overall and demonstrate that the way plans
currently fund and insure pension benefits has to change.
Underfunded pension plans are a symptom of the financial turmoil currently
facing the airline industry. Industry trends, including the emergence of well-
capitalized low cost airlines and other factors, have created a highly competitive
environment that has been particularly challenging for the legacy airlines. Since
2000, the financial performance of legacy airlines has deteriorated significantly.
Legacy airlines have collectively lost $24.3 billion over the last 3 years. Despite
cost-cutting efforts, legacy airlines continue to face considerable debt and
pension funding obligations. In this context, a number of legacy airlines have
begun to consider terminating their DB pension plans. For example, United
Airlines recently announced that it would not make roughly $500 million in
contributions to its pension plans this year and US Airways announced that it
does not plan to make roughly $100 million in contributions.
The problems of underfunded DB pension plans extend far beyond the airline
industry. We have highlighted several problems that have contributed to the
broad underfunding of DB plans generally, including airline plans. These
problems include cyclical factors like the so called "perfect storm" of key
economic conditions, in which declines in stock prices lowered the value of
pension assets used to pay benefits, while at the same time a decline in interest
rates inflated the value of pension liabilities. The combined "bottom line" result
is that many plans today have insufficient resources to pay all of their future
promised benefits. Other long term trends suggest more serious structural
problems to the system, including a declining number of DB plans, a decline in
the percentage of participants that are active (as opposed to retired) workers,
and other factors. Existing pension funding rules and the current structure for
paying PBGC insurance premiums have not ensured that sponsors contribute
enough to their plans to pay promised benefits.
The current pension crisis facing the airline industry and PBGC, and how the
Congress chooses to address that crisis, has wide-ranging implications for
airlines and other industries, as well as for pension participants, PBGC, and
potentially the American taxpayer. This crisis also illustrates the need for
comprehensive pension reform that tackles the full range of challenges crossing
all industries and not just airlines. Such a comprehensive reform would include
meaningful incentives for sponsors to adequately fund their plans, provide
additional transparency for participants, and ensure accountability for those
firms that fail to match the benefit promises they make with the resources
necessary to fulfill those promises.
United States Government Accountability Office
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United States. Government Accountability Office. Private Pensions: Airline Plans' Underfunding Illustrates Broader Problems with the Defined Benefit Pension System, text, October 7, 2004; Washington D.C.. (digital.library.unt.edu/ark:/67531/metadc295080/m1/2/: accessed September 19, 2018), University of North Texas Libraries, Digital Library, digital.library.unt.edu; crediting UNT Libraries Government Documents Department.