Pension Freezes in Delta Airlines Inc. and Blonder Tongue Lab Inc.: Different Paths, the Same Fate

INTRODUCTIONThis study examines the factors associated with pension freezes involving labor unions around the Pension Protection Act of 2006 (PPA). In 2006, SFAS 158 and the Pension Protection Act significantly changed how firms were required to report the financial position of their defined benefit pension (DBP) plans. The new rules required firms to make additional contributions to their pension funds if the funding status, as measured by the difference between fair value of assets and projected benefit obligation (PBO), was under-funded. As a result of the increase in pension contributions for firms with under-funded pensions, many companies faced the choice of freezing their pensions and/or filing for bankruptcy (e.g., the airline industry and steel industries).Our overall goal was to compare firms' freeze choices before and after the new pension rules of 2006. We obtained data from the 5500-CRR database (Form 5500 Annual Reports Data Base compiled by Center for Retirement Research in Boston College) and Compustat to identify firms with DBP plans with labor unions (i.e., collective bargaining agreements) during 2004 to 2008, which is the most recent year of available data from the center. Our initial search identified 311firms, and data requirements reduce the sample to 230 firms. Of these firms, we noted that there were only two firms that decreased their service costs (as measured by Compustat data item #331) to zero in fiscal year 2007; this suggests these firms decided to freeze their DBP plans in 2007, the year after the pension rules took effect. These two firms were Delta Airlines Inc., which was in bankruptcy, and Blonder Tongue Lab Inc., which was in more stable financial health.What is notable about Delta and Blonder Tongue is that, at the time they decided to freeze their pensions, the firms were in very different states of financial health. As both SFAS 158 and the Pension Protection Act of 2006 were taking effect, Delta was in bankruptcy. Delta explicitly stated that its motivation in freezing its pension plan was to save costs and emerge from bankruptcy. In contrast, Blonder Tongue Labs was just returning to profitability. Blonder Tongue announced in its 10K that it was freezing its pension plan, and one factor briefly mentioned was its desire not to violate financial covenants.These two firms serve as a real-world example that financial health may not be the main determinant of the decision to freeze pension plans. Using these two firms, we conduct a case study to explore why financial health is not the deciding factor in the choice to freeze defined benefit pension plans. Our study contributes to the literature in that this is one of the first to examine the choice to freeze pension plans before and after the 2006 time period with the SFAS and PPA requirements.BACKGROUNDSFAS 158 and the Pension Protection Act of 2006: In September of 2006, the FASB issued SFAS 158, Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans. Prior to SFAS 158, firms with defined benefit pensions plans (DBP) only had to report the pension fund status (i.e., whether it was funded or under-funded) in a footnote. After SFAS 158, firms with DBP plans had to recognize the fund status as either an asset or liability to be reported in the body of the balance sheet. This rule was argued to cause a significant increase in pension liabilities on firms' balance sheets.Pension Protection Act of 2006 requires companies with under-funded pension plans to pay higher premiums to the Pension Benefit Guaranty Corporation (PBGC), which is a federal agency created under the ERISA. This funding requirement is a mandatory contribution for the firm, which increases costs and the likelihood that firms will choose to freeze their defined benefit pension plans.Pension Freezes: Prior studies have examined the freeze decision around regulation changes. Beaudoin, et. al. (2010) examine whether freeze announcements of DBP plans made during 2001-2006 were motivated by accounting concerns due to the pending adoption of SFAS 158. …