M E M O R A N D U M

TO: James C. Little

Gary Yingst

FROM: Arthur M. Luby, Esq

DATE: 02-06-03

RE: Pension Overview

A number of questions have come up about the rights of our members to their pensions in the event of an American bankruptcy. I have attempted here to provide a summary account of our membersí rights in response to common questions. This memorandum is not intended to address individual situations or provide benefits calculations, but rather only to give a basic overview of employee rights.

1. Vested pension benefits based on credited service which has already been rendered (referred to as "accrued benefits") cannot be reduced. Therefore, even if American is able to persuade a Bankruptcy Court to modify the collective bargaining agreement with respect to pensions, such modifications can only be applied prospectively, that is, to benefits earned in the future, not retroactively.

2. As stated above, a pension plan can be modified prospectively by a Bankruptcy Court. In addition, if we reach a point where American cannot fund the plan at a level high enough to pay vested benefits and/or benefits owed retirees, the Pension Benefit Guarantee Corporation (PBGC) S the government agency which insures pension plans S may take the plan over and order it terminated. In those circumstances, the PBGC takes control of the pension funds and takes on the obligation of paying vested benefits and pensions in pay status up to certain maximum limits. When the PBGC takes over a plan, it also takes on the responsibility for determining final benefit eligibility and benefit figures. The PBGC maximum guarantees are presently as follows:

PBGC Monthly Benefit Maximums for Single Employer Plans Terminating in 2003

Age

Maximum

Guarantee

per Month

Maximum

Guarantee

per Year

65

$3,664.77

$43,977.24

64

$3,408.24

$40,898.88

63

$3,151.70

$37,820.40

62

$2,895.17

$34,742.04

61

$2,638.63

$31,663.56

60

$2,382.10

$28,585.20

59

$2,125.57

$25,506.84

58

$1,869.03

$22,428.36

57

$1,612.50

$19,350.00

56

$1,355.96

$16,271.52

55

$1,099.43

$13,193.16

The above guarantees are less if the employee has selected a survivorship option. The PBGC does not guarantee more to employees who choose plans which provide higher benefits prior to age 65 in exchange for a social security offset later.

3. In addition to the above limits, the PBGC has what is known as the "five year" rule under which improvements to a pension plan made within five years of the planís termination are not fully guaranteed. TWU represented employees secured two such improvements in the last contract S the right to unreduced retirement at age sixty and the adjustment of the contractual formula to provide payment based on the annuitantís highest four earnings years. These sorts of improvements are generally guaranteed on a sliding scale S i.e., 20 per cent after the increase has been in effect one year (subject to the benefit maximum), 40 per cent after two years (subject to the above benefit maximums), 60 per cent after three years (subject to the benefit maximum), 80 per cent after four years (subject to the benefit maximum), and 100 per cent guaranteed after five years (subject to the benefit maximum). Any guarantees are also predicated on an assumption that American has met its legal funding obligations in the past, something which AA states that it has done and which it appears it has.1

4. The Company is required to give current and future retirees 60 days notice of its intent to terminate a pension plan prior to termination. This limit does not apply to a "distress" termination ordered by the PBGC when it takes over a plan, but the PBGC must give as much notice as possible.

The decision to retire is a crucial lifetime decision. It should not be driven by the notion that an employee who retires before a bankruptcy or a plan termination has greater right to his or her vested benefits than one who retires after such events. As stated above, rights to pension benefits can be changed and limited prospectively, and such changes may or may not make continuing to work worthwhile. That is a value judgment for each worker. However, the PBGC does not supply any greater guarantee of vested benefits based on rendered service to employees who retire before it takes over a plan, and the law does not supply greater legal protection to the vested benefits of retired employees over the vested benefits of active employees nearing retirement.

I have supplied your office with questions and answers to common pension questions published by the PBGC. That information should be reviewed along with this memorandum. I will follow up with a discussion of common questions on retiree medical within the next two weeks.

AML:pad

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1We note that recent newspaper accounts have indicated that, based on the decline of the stock market and several steel industry bankruptcies, the PBGC may be under funded. Obviously, no one besides the Congress and the President can guarantee that the agency itself will remain solvent enough to meet its obligations.