The Association of U S West Retirees



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 federal government.

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 January.

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 good.

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 Guaranty Corporation.

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.