Anemic Pension Funds Still Hemorrhaging

Here's a problem with traditional corporate pensions that I hadn't really thought about: in bad times, when the fund looks shaky, they may be vulnerable to something akin to a bank run:

That's the kind of uncertainty prompted American Airlines Captain Rod Carlone to leave the work force last month, much sooner than he had expected. Carlone says he did not want to risk missing out on a lump sum payment if the American Airlines Pensions Inc. Pilot Retirement Benefit Program Fixed Income Plan (the pilot pension plan) was underfunded. After almost 24 years at American, he flew his last flight on September 30 from Dallas to Los Angeles.

"I can't afford at almost 62 a financial setback I could not recover from," Carlone says. "I live in Las Vegas, and this is one wager I didn't want to make."

Concerns about the pension have resurfaced in recent months, but the airline says participants shouldn't worry. "We have a history of meeting our pension obligations," says Sean Collins, director of financial communications at American Airlines.

If people are concerned about the health of the pension, they may be more likely to retire early--or to take the lump sum, rather than the regular payments.  This forces the pension to liquidate assets just when prices are weakest, and further undermines the health of the plan.

And pension plans are not healthy right now.  They're getting hit by a double-whammy: tougher funding requirements, and a market that's not doing much.  As an institutional fund manager I recently spoke to told me, "correlations are too tight right now; all you can do is trade the spread."

There's not much to be done about this--I'd need some pretty powerful convincing before I'd argue in favor of relaxing pension funding regulations.  (Though anyone who wants to try is hereby invited to give it a shot).  And if politicians knew how to make the markets healthier, they'd have done it a long time ago.  Still, this is another vulnerability in a system that really didn't ned another vulnerability.