Wednesday, June 22, 2005

Pension audits

The Aircraft Mechanics Fraternal Association, a union representing 16,000 airline ground workers, has requested an investigation into possible mismanagment of United Airlines' pension fund. On Monday the association sent a letter to Secretary of Labor Elaine Chao and Bradley Belt, the executive director of the Pension Benefit Guarantee Corporation (PBGC). The PBGC has never conducted such a forensic audit of any plan it has taken over.

"The PBGC and its plan termination insurance are increasingly called upon to protect and pay the pension obligations promised by large, troubled corporations," O.V. Delle-Femine, the union's national director, said in the letter. "The PBGC and responsible plan fiduciaries should, as a matter of course, undertake forensic audits of any distressed plans in order to determine whether any of the parties providing financial services to the plans may have contributed to their demise...Unfortunately, at this time, forensic audits of pensions virtually never are undertaken and wrongdoing related to pension failures has gone undetected."

Legislative liaison Maryanne DeMarco said the union was not aware of specific wrongdoing in the management of United's pension funds, but noted that a US Securities and Exchange Commission (SEC) report released last month indicated widespread conflicts of interest exist among pension consultants and money managers that may cause significant financial damage to pension funds.

United used Russell Investment Group as its chief pension consultant. Russell is also listed as investing money for United via alliances with other money managers. Russell's wide-ranging operations appear to be of the sort the SEC has called on plan overseers to investigate carefully.

"They are a huge broker, a money manager and supposedly provided objective advice to the largest pension failure in history," said Edward Siedle of Benchmark Financial Services, a firm that investigates possible wrongdoing among money managers and was consulted by United's union. "If that doesn't merit an investigation, I don't know what does."

After the savings and loan crisis in the 1980s the Resolution Trust Corporation (RTC) conducted forensic audits and barred firms found to have misbehaved from further work. But lawyers for the Labor Department and PBGC have stated that they have not conducted forensic audits in the past and do not have such capabilities in-house.

Given that United's bailout is probably the beginning of a chain reaction by the end of which the entire airline industry (and likely the auto industry as well) will dump their pension obligations on taxpayers, it is critical that the PBGC follows the lead of the RTC. Otherwise we will find ourselves subsidizing the enrichment of a few shareholders.

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