Bush pension reform plan could hurt cash flow of weak companies, says Moody's analyst

By Ted A. Knutson

Washington, Feb.18 - The Bush administration's pension reform plan could hurt the cash flow of financially weak airlines and other ailing companies, Moody's vice president and senior analyst Gregory Clifton told Prospect News.

Clifton said the proposal, which needs Congressional approval, would impose more stringent pension funding requirements on "at risk" plans at companies which have had junk bond status for five years or greater than for "on going" plans at businesses with investment-grade debt.

In an admitted over-simplification, Clifton said with an ongoing plan the proposal says that assumptions are required to be reasonable based on the plan's historical experience.

"For example, assume the average employee retires at age 58, 20% of retirees take lump sum pension payments and the earliest retirement age is 50. The calculation of the ongoing plan's liability would consider this experience," Clifton said.

"For at risk plans, however, the proposal says that in calculating the liability you must assume every retirees retires at age 50, the earliest retiree age allowed and all retirees are going to take lump sums."

The proposal also calls for increased premiums to the Pension Benefit Guaranty Corp., the federal agency that insures pensioners' benefits, both for flat-rate premiums and risk-based premiums. Plans at risk will pay higher premiums than ongoing plans.

A feature in the Bush plan that could aid financially troubled firms would lengthen to seven years from the current three to five years the time that companies have to fully fund an underfunded pension plan.

Clifton said five airlines have unfunded defined benefit pension plans, excluding the carriers in bankruptcy.

As of the end of 2003, the latest date available, Alaska Airlines Inc.'s plan was underfunded by $276 million; AMR Corp.'s plan was underfunded by $2.6 billion; Continental Airlines Inc. by $1.1 billion; Delta Air Lines, Inc. by $5.7 billion and Northwest Airlines, Inc. by $3.7 billion.

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