U.S. Investigates Pension Fund at Northwest Air
By Mary Williams Walsh
New York Times
Wednesday, March 15, 2006
The Labor Department is investigating whether Northwest
Airlines systematically shortchanged its employee pension
fund over three years, then avoided having to make a $65
million payment to the fund by filing for bankruptcy
protection just one day before the payment was due.
The government has subpoenaed voluminous and detailed
information from Northwest going back to January 2002, when
both the airline and its pension fund faced severe financial
pressures after the terrorist attacks of 2001 and the
bursting of the technology bubble in the stock market.
The investigators appear to be tracing the steps that led to
the pension fund's recent shortfall of $5.8 billion, and
whether Northwest violated any laws.
The investigation has implications for many businesses
besides Northwest that have shaky pension plans. It
suggests that the Labor Department is looking for a way to
break an entrenched pattern, in which distressed companies
quietly deplete their pension funds over a number of years,
then declare bankruptcy and transfer huge obligations to the
Officials of the Labor Department confirmed the
investigation but declined to elaborate, other than to say
it was a civil matter concerning the parts of the pension
law that deal with funding and the disclosure of information
to participants and regulators. The officials also said
that the inquiry was looking at whether corporate pension
officials had administered the plans "solely in the interest
of the participants" in the pension plans, which would
fulfill their fiduciary duty. The subpoena was served in
A Northwest spokesman said yesterday that the company had
provided some of the documents sought, but was fighting to
keep others confidential, and was scheduled to appear in
court later this month to argue for a protective order.
Separately, the airline has been lobbying Congress for
special relief from the pension law.
Fiduciary duties to pension participants can sometimes
collide with corporate officials' fiduciary duties to their
shareholders, especially when a company is struggling
financially and trying to conserve cash. Employees caught
up in recent pension fund collapses have said they were not
adequately warned of the impending failure and have
questioned how it could have happened if the people in
charge had kept their interests foremost.
The Labor Department, responsible for enforcing the
fiduciary duty requirements, has lately emphasized voluntary
compliance, operating a successful amnesty program to help
errant pension officials bring their plans back into line.
Even so, an alarming number of large plans have collapsed in
the last few years, leaving the government to cover huge
debts to retirees.
The Pension Benefit Guaranty Corporation, which has taken
over the failed plans, has gone to court to try to hold some
of those companies responsible, but it has little power to
act until after a pension fund has failed, and by then it is
usually too late to recover much of the missing money. The
Internal Revenue Service shares enforcement of the pension
law, and it sometimes imposes excise taxes on companies that
skip their pension payments. But it has no authority to
enforce fiduciary duty.
Enforcement of the pension law, therefore, has been
piecemeal, with no one agency responsible for making sure
the plans remain solvent.
Last fall, after the $10 billion collapse of the pension
fund at United Airlines, the Labor Department agreed to
coordinate with the I.R.S. on enforcing the pension law's
minimum funding requirements. At the time, the I.R.S.
expressed concern about a flood of requests from companies,
and some union-run plans, to waive or postpone their
mandatory annual contributions. The requests had swamped
the I.R.S.'s systems for evaluating such applications and
following up to make sure the companies eventually made
The I.R.S. declined yesterday to say whether it was working
with the Labor Department on the Northwest investigation.
But Joseph H. Grant, an agency official, said it was
"working in close cooperation with the other federal
agencies that oversee pension plan operations."
He added, "This is particularly the case when pension plans
are significantly underfunded."
Northwest received a waiver from the I.R.S. in 2003,
allowing it to reschedule that year's pension contributions
over five years. Since then, it has been seeking additional
ways to reduce or postpone its contributions for 2004, 2005
and beyond. Some of the delayed contributions are now
starting to come due, and the airline has been lobbying
Congress to give it still more time. The Senate has passed
a measure that would give Northwest and the other major
airlines 20 years to catch up on their pension contributions
— nearly three times as long as most companies would get
under a major revision of the pension law that has been
passed by both houses of Congress.
The pension bill is now being completed in a House-Senate
conference committee. Many members of the House have also
said they support additional relief for the major airlines,
fearing that without it, the pension plans will simply
fail. This week a lawyer for Delta Air Lines said in an
arbitration hearing that it was "more likely than not" that
Delta would send its pension funds to the Pension Benefit
In its motion for a protective order against the Labor
Department's subpoena, Northwest is arguing that the demand
is "extremely broad" and that full cooperation could
"threaten or undermine" its ability to reorganize in
bankruptcy. A hearing has been scheduled for later this
month in United States Bankruptcy Court for the Southern
District of New York, in Manhattan.
In the motion, Northwest said it was "willing to cooperate
fully" with the Labor Department but not unless the
government gave it more forceful guarantees that
confidential financial information would be kept private and
not used "as leverage to pressure" it.
Northwest's pension fund consists of three individual plans,
for about 8,000 pilots, 9,000 salaried employees and 52,000
unionized workers, including mechanics and agents. At the
end of 2004, the plans owed a total of $9.2 billion to their
participants but had assets of just $5.4 billion.
By filing for bankruptcy when it did, Northwest made the
federal government an unsecured creditor for the $65 million
that was coming due the next day. Once a company declares
bankruptcy, an automatic stay prevents creditors from
placing liens on corporate assets and forcing the company to
pay its debts, including debts to its pension funds.