The much-publicized American Airlines bankruptcy case got more press last week when the company announced changes to plans it had published to terminate pensions for current and future retirees as part of bankruptcy cost-cutting measures.

Now, it seems, American will only freeze the pensions, and the freeze (at present) will only apply to ground crew members and flight attendants (pilots’ pensions will be handled differently; see below).

Employees whose pensions are frozen will not be eligible to receive additional benefits beyond what they have currently earned; however, they can expect to collect pensions when they retire, up to the amount they currently qualify for.

A Delicate Financial Game

The details of the pension negotiations demonstrate just how tricky a corporate bankruptcy case can be. Here’s a look at what’s going on behind the scenes as American attempts to figure out how to handle the pensions of its pilots.

• Before the bankruptcy, pilots for American (who received the largest pensions of all employees) had the choice of taking their pension payments over the course of their retirement or of taking an initial lump-sum payment, then collecting smaller payments during the course of their retirement.
• Prior to announcing the pension freeze, American apparently had plans to hand over the pension matter to a federal government agency, which would have likely instituted stricter limits on the amount of pay pilots could receive each year (at present, pilots who retire at 65 can earn $54,000 per year in retirement; older retiring pilots can earn more).
• In bankruptcy, American is hoping to eliminate the option for pilots to receive a lump-sum payment. The company is worried that pilots would retire en masse to collect their lump payments in a hedge against further financial problems that would lead to a government takeover (and smaller lump payments). American, it seems, is worried that it would lose so many pilots to retirement that it would be unable to continue flying planes.
• As many as a third of the pilots currently working at American would apparently earn less from their pensions if the federal government takes over payments.

As American’s bankruptcy negotiations play out, pilots and executives alike are attempting to hedge their bets to maximize their benefits. According to the Washington Post, however, American at present does not have enough money set aside to cover pensions as they now stand.

A failure to put enough money aside over the years led to the current shortfall, and unless the company is able to find additional money to transfer to pension funds during the bankruptcy reorganization, the future of employees’ pension payments remain hazy.