A new wave of bankruptcies is set to put more pressure on the Pension Benefit
Guaranty Corporation (PBGC), the US pension agency that insures pension benefits of private pension plans covering some 44m of America’s workers and retirees. For fiscal year 2011, the PBGC has already reported a record $26bn (€19.8bn) deficit - the largest in its 37-year history and $3bn more than the $23bn deficit reported the previous year.

The deficit will go up if the companies that recently filed for Chapter 11 - such as Hostess Brands, Eastman Kodak and American Airlines parent AMR - decide to terminate their employee pension plans. AMR alone could add an $8.7bn loss to the agency, becoming the largest one ever suffered by the PBGC.

The latter stresses on its website that it “receives no taxpayer dollars and never has; its operations are financed by insurance premiums and with assets and recoveries from failed plans”. However, it is a “federal corporation” - created under the Employee Retirement Income Security Act of 1974 - and if the deficit turns out to be unsustainable the federal administration could be forced to use taxpayers’ money to bail it out, as it did for two other “quasi government” agencies at the epicentre of the 2008 financial crisis, Fannie Mae and Freddie Mac.

Under Chapter 11 of the US bankruptcy code, it is possible for insolvent companies to survive by shedding legal debts and obligations that they can’t or don’t want to pay - often, first of all the pension obligations. Moreover, retirees in line for pensions are considered unsecured creditors at the bottom of the list of who gets paid. This rule is quite different from other countries’ bankruptcy laws, and it has been challenged by other authorities in cases involving employees of American corporations abroad. For example, the UK Pensions Regulator, while dealing with the UK ramifications of Lehman Brothers’ and Nortel Networks’ bankruptcies, has recently argued that pension plans deserve priority over other unsecured creditors.

Eastman Kodak will be the next case to test the differences between the US and the UK systems. When the company disclosed its top 50 unsecured creditors, it revealed that its underfunded UK pension plan tops the list, with some 15,000 members and a shortfall of £576.5m (€694m). Meanwhile, Kodak’s two US traditional pension plans, which cover almost 63,000 people, “are reasonably well funded”, according to the PBGC; they have about $4.9bn in assets to cover some $5.6bn in benefits, with an 86% funding ratio. The PBGC is among those named to the committee that will represent Kodak’s unsecured creditors during its bankruptcy case, listing assets of $5.1bn and debt of $6.8bn.

It is possible for a company in bankruptcy to continue its pension plan after the sponsor reorganises, or after a new owner assumes operations. In 2011 it happened with 19 companies whose pension plans cover about 74,000 people. But, more often, if a company goes bankrupt, the plan will be taken over by PBGC.

AMR has not said yet if it will seek court permission to terminate its four plans, which cover nearly 130,000 people, with about $8.3bn in assets and $18.5bn in promised benefits.

However, American Airlines is only the last major airline to use bankruptcy to slash costs, shedding some or all pensions and revising labour contracts since then-Continental Airlines chief Frank Lorenzo invented the strategy in 1983.

The PBGC is now responsible for the retirement benefits of about 1.5m Americans and its “liabilities” for these and other purposes total $107bn, with $81bn in assets to cover these obligations, hence the deficit. The US Administration has proposed to increase premiums paid by the companies whose defined benefit pension funds are guaranteed by PBGC, but this would encourage employers to abandon even more the traditional plans, worsening the situation.