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United's pension loophole flight plan
United, many other companies, seen using Fed rules to make troubled pension plans look healthy.
June 7, 2005: 8:07 AM EDT
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NEW YORK (CNN/Money) - United Airlines used loopholes in federal pension laws to treat its pension funds as solid for years, when in fact they were dangerously weakening, according to a published report.

The New York Times said an analysis by the Pension Benefit Guaranty Corp. of the problems that led to a federal takeover of the United plans will be presented to a Senate Finance Committee hearing Tuesday.

Meanwhile, the paper reports that a second report, by the comptroller general, found that most companies that operate pension funds are using the same rules. The federal regulations that govern the so-called defined benefit pension plans, which promise a set monthly payment to retirees, no matter the assets in the funds, give companies ways to make their pension plans look healthier than they really are, reducing the amount of money the companies must contribute.

The PBGC is the federal agency that backs private sector defined benefit plans. It is now on the hook for promised pension benefits for 120,000 current and former United employees. The plans were an estimated $9.8 billion short of the assets needed to pay promised benefits when PBGC assumed control. But due to limits on pension payments by the agency, the gap for the PBGC assuming those funds is expected to be $6.6 billion.

"The rules are full of serious holes that need to be fixed as soon as possible," Sen Charles Grassley, the Iowa Republican who chairs the Senate Finance Committee, told the paper. "No one should make the mistake that this is an airline-only problem. The reality is that companies everywhere have used the same arcane pension-funding rules "to shrink their contributions."

The pension plans at United are the largest to ever end up under the control of the PBGC. They have helped lead the agency to have its own gap between assets and promised benefits of $23 billion.

The paper said trouble is that at United, as at many companies, money contributed to funds in the 1990's lost value during the bear market that began in 2000. But the pension rules allowed companies the to keep the original value of their contributions, plus a merely hypothetical positive return on those assets, on the books.

A separate report in the Washington Post Tuesday says the 1,108 weakest pension plans in the nation had assets that were short of promised benefit levels by an aggregate $353.7 billion at the end of last year. That gap is up 27 percent from a year earlier.

For a look at other causes and proposed solution to the shortfall of the nation's pension plans, click here.  Top of page

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