Reference no: EM132243379

After reading the article, answer the following questions:

Is it ethical for companies to default on their pension obligations (the defined benefit kind)? Why or why not? Mention the ethical rule(s) that you draw upon (e.g., utilitarian, moral rights, etc.) in providing your answer.

What should companies, who find themselves in a financial crisis, do when their pension obligations are creating potential bankruptcy?

Should the government do more? Are you willing to pay more taxes to keep the PBGC solvent in the face of a potential onslaught of pension defaults in the future?

Link to article: United_terminates_pension_plan_5-10-05.pdf

United gets approval to shift pension plans

Decision clears way for biggest

corporate-pension default ever

Richard Ward, a retired United Airlines captain of 31 years, leaves the federal courthouse during a lunch break on Tuesday. A bankruptcy judge approved the airline's bid to terminate its employees' pension plans.

CHICAGO - A federal bankruptcy judge approved United Airlines’ plan to terminate its employees’ pension plans onTuesday, clearing the way for the largest corporate-pension default in American history.

The ruling, which carries broad implications for U.S. airlines and their workers, shifts responsibility for United’s fourdefined-benefit plans to the government’s pension agency.

That will save cash-strapped United an estimated $645 million a year, part of the $2 billion in annual savings it says it needs to line up enough financing to emerge from Chapter 11 bankruptcy as soon as this fall.

But the cost will be painful to its employees, who stand to lose thousands of dollars annually off their pensions when they are assumed by the Pension Benefit Guaranty Corp.

The PBGC, the government’s pension insurer, initially opposed United’s plan. But it agreed to drop that resistance lastmonth in exchange for up to $1.5 billion in notes and convertible stock in a reorganized UAL Corp., United’s holdingcompany.

United’s pensions are underfunded by an estimated $9.8 billion, of which the PBGC would guarantee only about $5 billion.The previous largest U.S. pension default was Bethlehem Steel’s $3.6 billion in underfunding in 2002.

Judge Eugene Wedoff said the settlement, while disputed, does not violate any law or United’s collective bargainingagreement and he noted that employees at companies such as United could end up with fewer or even no benefits if no arrangement is made and the company goes broke.

“The least bad of the available choices here has got to be the one that keeps an airline functioning, that keeps employeesbeing paid,” Wedoff said.

United Chief Financial Officer Jake Brace said the ruling is crucial for United to come out of bankruptcy.

“It’s not a good outcome. It’s unfortunately a necessary outcome,” he said. “This is not in any way a joyous day. It is animportant step in our restructuring and in making our airline successful and viable for the long term.”

United’s controversial move risks provoking action by employees who already have agreed to sharp cuts. Unions haveraised the possibility of striking if United dumps the pensions.

The Association of Flight Attendants, which threatened unspecified labor actions if the pensions were struck, will meet to decide its next step, said spokeswoman Dianne Tamuk.

“We feel sold out,” by the action, she said. Tamuk, 49, said her pension will be reduced from $1,700 a month to $800 amonth by Wedoff’s ruling.

United’s effort to dump its pensions has been watched closely by the rest of the airline industry, where record fuel costs,the lowest fares since the early 1990s and stiff competition have caused network carriers to lose billions of dollars.Tuesday’s ruling, following a step taken successfully by US Airways Group Inc. in February, clears the way for similaractions elsewhere.

United’s biggest competitors would be under the most pressure to follow suit. American Airlines, the largest U.S. carrier and a unit of AMR Corp., has said it will keep its pension plans but is concerned about No. 2 United gaining a financial advantage with the elimination of its pensions.

On Wednesday, flight attendants for American will gather in Washington to lobby for federal pension reform that would allow carriers to extend the amount of time they have to replenish underfunded plans and provide relief to airlines that seek, through collective bargaining, to preserve rather than terminate their pension obligations.

No. 3 Delta Air Lines Inc., which has said it is in danger of being forced to file for Chapter 11 bankruptcy, faces $3.1 billion in pension payments over the next three years.

An overflow crowd of current and former United workers showed up at bankruptcy court Tuesday, with more than 100 packing the courtroom and dozens more listening to piped-in proceedings in a separate courtroom.

Unions representing United’s flight attendants, mechanics and ramp workers have expressed their ire at both the airline and the government’s pension insurer, PBGC, for agreeing to drop its opposition to United’s plan last month.

Attorney Jeffrey Cohen said the PBGC, which might have been unable to halt United’s plan in any case, made the agreement as “a matter of last resort.” Disputing the flight attendants’ contention that the deal violated its mission, he said the agency concluded that cutting a deal was in the best interest of not only those with pensions at United and other companies but also for taxpayers who fund the pension insurer.

In addition, he said, “We think it helps clear a path to the exit door” for United to leave bankruptcy.

Lawyers for United’s unions spoke ardently earlier Tuesday against the proposal.

Robert Clayman, an attorney for the Association of Flight Attendants, drew loud applause and cheers from employee spectators in both the courtroom and auxiliary court with an emotional appeal to preserve the pensions and workers’secure retirements.

“Without equity there is no justice,” he said.

Jack Carriglio, an attorney for retired United pilots, said the airline should be ashamed of the agreement and warned of the consequences among angry employees.

“A strike is a real prospect if that agreement is approved,” he said. “Also, this will have a grave impact on United employees’ morale.”