http://www.chicagotribune.com/business/chi-0408180118aug18,1,5310407.story?coll=chi-business-hed

United removed pension execs

Labor agency objects; overseer to be independent

By Melissa Allison
Chicago Tribune staff reporter

August 18, 2004

A month before United Airlines said it would stop funding its pension plans, it quietly removed three top executives charged with protecting employees' retirement interests and named itself the fiduciary for the plans, creating what a government official called a "hopeless conflict of interest."

"We were pretty flabbergasted with their blatant attempt to remove people and replace them with a judgment-proof bankrupt company," Ann L. Combs, assistant secretary of labor for the Employee Benefits Security Administration, said Tuesday. "It was pretty outrageous. We hadn't seen anything quite that blatant."

When the Labor Department found out, it called United and demanded that the airline explain itself. The result was an agreement reached Tuesday between the carrier and the government to appoint an independent party to manage the pension plans.

Such parties often are named when conflicts of interest arise.

What caused jaws to drop at the Labor Department was United's attempt to protect its executives by making itself--a bankrupt company that cannot be sued--the fiduciary shortly before stopping its pension payments.

The department joins a growing list of parties agitated by United's announcement in July that it would not fund its pension plans while it remains under court protection.

The decision has alienated workers, who believe the airline wants to terminate their retirement plans, and inflamed the Pension Benefit Guaranty Corp., which has asked a bankruptcy court to force United to make the payments.

The International Association of Machinists and Aerospace Workers has filed two lawsuits against United executives accusing them of violating their duties to employees and creditors by not funding the pension plans.

United says that a new $1 billion financing package prevents it from making pension payments while in bankruptcy. The U.S. Bankruptcy Court in Chicago will hear arguments on the matter Friday.

The airline disagrees with the Labor Department's characterization of its actions, said spokeswoman Jean Medina.

"When the fiduciaries saw the potential for a conflict of interest, given their role as part of senior management, they believed it was proper to resign" as members of the pension plans' administrative committee, Medina said.

The committee comprised Chief Financial Officer Jake Brace, Chief Operating Officer Peter McDonald and Senior Vice President-People Sara Fields.

Medina said it is common for a company to serve as both sponsor of its pension plans and the sole fiduciary for those plans.

Now United is searching for an independent fiduciary. It must be approved by the Labor Department and needs to be in place before Sept. 15, when United is scheduled to make a payment of $400 million to its pension funds. It missed a payment of $72 million on July 15.

United has four pension plans covering almost 119,000 workers and retirees, according to the Pension Benefit Guaranty Corp. The plans are underfunded by $8.3 billion, of which the PBGC figures it would be liable for $6.4 billion if they were terminated.

The cash-strapped, quasi-government agency has said it is worried that if United terminates its plans, other airlines might follow suit to remain competitive.

The union representing United's flight attendants, which also has filed an objection to the airline stopping its pension payments, said Tuesday that "there appears to be a recognition of the need for independent oversight as it relates to United's decision not to fund its employee pension plans. It also may signal that the appointment of an independent trustee is appropriate for oversight of all of United's decisions."

In a motion to be heard in September, the IAM has asked that the court appoint a trustee to oversee United for the duration of its bankruptcy.