By Allan Sloan
Oct. 17, 2005 issue - One reason flying can be such a drag is that sinking feeling you get when you start talking to your seatmate and discover that she paid much less for her ticket than you did. The trick, of course, is to have access to the best information. What's true for airline fares is also true for airline shares. And for airline pension funds, too, given what happens when an airline goes broke.
Pension-fund information—and the lack of it—links Northwest Airlines chairman Gary Wilson and 9/11 widow Ellen Saracini, whose husband was a United Airlines pilot. Guess what? Wilson benefited by having access to all of Northwest's pension numbers, while Saracini paid a steep price for not having access to United's pension-fund numbers.
Wilson is a frequent seller, unloading more than 85 percent of his Northwest stock this year as the airline spiraled toward bankruptcy. Total proceeds: $19.7 million, according to Thomson Financial. Throughout Northwest's descent, Wilson had access to an important number that wasn't publicly disclosed until Northwest filed for bankruptcy in mid-September and its stock became virtually worthless. To wit: the $5.7 billion shortfall in Northwest's pension fund, as calculated by federal pension insurers. That's half again as large as the $3.8 billion Northwest had reported in its most-recent financial filings.
This difference really matters. The U.S. Pension Benefit Guaranty Corp.'s huge claim in the Northwest bankruptcy virtually ensures that stockholders—including buyers of Wilson's shares—will end up with nothing. It also means that many pension recipients and creditors will get far less than they expected. Northwest's numbers differ from the PBGC's because Northwest is allowed to assume that its pension funds will stay in business for decades. This produces a far lower pension-obligation number than the PBGC, which assumes the pension fund is terminating and finds out what an insurer would charge for annuities to cover its obligations.
Northwest, like many other companies, has been filing a pension-termination number with the PBGC for years, as required by the laws covering pensions. Wilson, as a board member, had access to the number, which the PBGC is legally barred from disclosing to the public. Northwest could have disclosed it voluntarily. That would have given the buyers of Wilson's Northwest stock a level playing field and given employees and creditors information vital to their interests. But—like other companies in similar circumstances—Northwest didn't make the number public because it wasn't required to. All Northwest would say was that it and Wilson had done nothing illegal, and that Wilson wouldn't talk to me.
Contrast Wilson with Saracini, whose husband was a pilot on doomed United Flight 175, which terrorists crashed into the World Trade Center's south tower. When the September 11 Victim Compensation Fund settled with Saracini, it subtracted the value of her husband's full United pension from her settlement, as its formula required. But Saracini won't get anything like a full pension because the shortfall in United's pension funds was so much greater than the company had disclosed. This wasn't clear until May, when the PBGC terminated United's pension funds and showed a $9.8 billion shortfall. United had been showing only a $6 billion shortfall.
I can't tell you how much of a haircut Saracini got on her 9/11 settlement—she declined to tell me, and the fund isn't allowed to disclose it. But trust me, it's major money. Had the 9/11 fund known how much the pensions of Saracini and other United employees' survivors would shrink, they would doubtless have gotten larger settlements. "I've lost my husband's pension twice," Saracini told me.
Pension legislation in the Senate would force all companies with below-investment-grade credit ratings, including Northwest, to publicly disclose the pension-termination numbers they send the PBGC. That seems only fair. Everyone should have access to these vital numbers—not just members of the platinum elite.
© 2005 Newsweek, Inc.