DAL DB Termination and the PBGC

Let’s step out of the timeline for a moment and consider some additional information as it relates to the DAL DB Plan termination. At the time the plan was terminated, it had approximately $1.7 billion in assets compared with approximately $4.7 billion in liabilities. Additionally, the two Delta non-qualified plans had been costing Delta cash outlays of approximately $84 million per year in benefit payments. The assets of the DAL DB Plan were turned over to the Pension Benefit Guaranty Corporation (PBGC) on December 31, 2006 and the PBGC became responsible for providing benefit payments calculated in accordance with the DAL DB Plan rules and formulas, but subject to the PBGC’s priority scheme and benefit limitations.

The detailed rules, regulations, and limitations of the PBGC are beyond the scope of this Report, but they will be discussed in broad terms. The first limitation is that the PBGC doesn’t protect non-qualified benefits at all, meaning the pre-merger Delta pilots who had a formula benefit that exceeded the 401(a)(17) limits immediately suffered a loss of the non-qualified portion of that benefit. Next, the PBGC has developed six “priority categories”, labeled PC-1 thru PC-6, to determine how the plan’s assets are allocated to accrued benefits. Without getting too deep into the technicalities of the structure, the categories that are relevant to the DAL DB Plan are categories PC-3, PC-4, and PC-5.

The benefit paid under the PC-3 calculation is the benefit the pilot would have been eligible to receive had he retired three years prior to the date of plan termination (DOPT), but using the DAL DB Plan provisions and IRS limitations that were in place five years prior to DOPT. So any pilot who was already retired, or was eligible to retire, on September 2, 2003, is generally owed a PC-3 benefit. When the DAL DB Plan terminated, its assets were sufficient to cover only 93% of all eligible pilots’ PC-3 benefit amounts.

Since the assets of the plan were exhausted paying PC-3 benefits, the PBGC itself was then responsible for paying all applicable pilots a PC-4 benefit. Generally, this benefit is calculated as the lesser of a) the pilot’s full vested qualified formula benefit, or b) the PC-4 maximum guaranteed amount of $30,978 (at age 60) for a plan terminating in 2006. For pilots who have benefits payable in PC-3, their PC-4 benefit is the excess (if any) of the benefit determined under this PC-4 calculation over their PC-3 benefit.

However, in the case of the DAL DB Plan, the PBGC (as part of its negotiations with Delta in bankruptcy) agreed to the termination of the plan only if Delta committed to pay the PBGC a note of $225 million upon bankruptcy exit. Furthermore, as a result of the termination, the PBGC received a bankruptcy claim in the amount of $2.2 billion. Upon Delta’s exit from bankruptcy, the note and claim were valued at an aggregate $1.23 billion and that money was shared, via a complicated formula, between plan participants and the PBGC in relation to their respective losses. As a result, participants’ PC-3 benefits increased to 100%, and additional funds flowed into PC-5. The result is that those pilots whose accrued benefit exceeded their PC-3 or PC-4 limited amounts were entitled to an additional benefit in PC-5. The PC-5 benefit, in general terms, covers the remaining benefit under the plan -- but only to the extent that there are PC-5 assets allocated to cover these amounts.

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