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Kodak’s gold-plated pensions take on a sepia tinge

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Eastman Kodak and its biggest unsecured creditor – a U.K.-based pension fund – are making the best of a very bad moment. Unusually, and unnervingly, the pension fund is buying two of the bust photo company's operating assets. In the process, Kodak is losing two viable businesses. The pension scheme, meanwhile, is taking control of assets that, if it had a genuine choice, it would not want.

At first sight, Kodak, the company operating under Chapter 11 bankruptcy protection, appears to be getting the better end of this unlovable deal. It will get rid of a $2.8-billion (U.S.) claim; it will receive $658-million in cash, or equivalents; and, perhaps most critically, the company will be absolved of any future obligation to shore up the U.K.-based scheme.

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The pension plan, on the other hand, gets lumbered with responsibility for running two businesses of questionable quality. It must shoulder the accompanying costs and risks. Kodak's pensioners are likely to see cuts in benefits. They also lose Kodak as backer of last resort. And if the company emerges from Chapter 11 and finds new prosperity, no benefit will flow to the pension fund.

So why did the pension fund agree? Because the alternatives were worse. Payments won through Kodak's Chapter 11 process could have been paltry. Pensioners would, probably, have wound up in the arms of the U.K.'s Pension Protection Fund with benefits more parsimonious than those offered in the standalone option.

The key question is whether cash flows from Kodak's personalized-imaging and document-imaging businesses will cover the obligations to pay retirement incomes. Since the obligations will wither away over the next 30 or so years – and, if members agree, may become less generous – there's no need to expect the acquired companies to shoot out any lights. Still, this is a long way from ideal.

If Kodak had been able to adjust better to the digital age, this best-of-a-bad-job solution would have been unnecessary. And in that way, the saga shows how so-called "gold-plated" defined-benefit pension plans can betray their gilt-edged reputation.

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