Airline Pension Funds

[shon7]

If the Airline Invests its pension funds and gets a positive return on its investment -- how is the profit distributed amongst the contributors (assuming that the airline matches the pensioners contribution upto 50% i.e. 50 cents to a dollar) ?

 

[pilot141]

Pensions are more complicated than what you have asked about.

The two traditional types of pensions are the Defined Benefit Plan (often called an "A-Fund") and the Defined Contribution Plan (often called a "B-Fund"). There are also 401(k) matching programs.

Here is the breakdown: The DB Plan (A Fund) is based on a calculation. Something along the lines of years of service x max pay achieved x some mortality factor = how much you get. Different calculations at different carriers, but the whole point is to have a DEFINED BENEFIT; ie you know that by flying for Airline X for 25 years, with the last 5 as a 767 Captain you will get Y dollars/year as a pension. Some airlines allow you to waive the yearly pension and take a lump sum payout of this money. In any case, it is a fixed amount of money that you can calculate well in advance. How the company gets the money to pay for it is up to them. This is how many companies (not just airlines) got in trouble over the last few years. Their pension funds were heavily invested in the stock market, and when the bubble burst so did a vast portion of their pension money. Since these are defined benefit plans and the money must be there for retirees, the only solution was to make massive cash infusions to cover the stock losses. In a very indirect sense the airline's pensions investments doing well help the average line pilot, because it means less cash must be siphoned off to cover these fixed obligations.

The Defined Contribution (DC, or B-Fund) is based on a specific amount of your pay being set away every month and invested. How much is set away varies by carrier (of course), as does who runs the investment. In most cases the company hires a professional brokerage to manage the funds. This brokerage has certain guidelines (ie it cannot invest all of the money in the technology sector, or it must have at least 20% invested in bonds, etc) but other than that it is free to do whatever it can to maximize your investment. Every month the required amount of money is contributed by the company and allocated by the investment team. Each month you acquire "units" of the B-fund, based on the dollar amount of your contribution. When you retire you get the lump-sum value of your units x the unit value. How much this is can vary greatly. Obviously guys who work for an airline longer will have more "units", but the unit value plays a huge role as well. Guys who retired in 1999 took home much more money than those who retired in 2001, even with the exact same career path. That's why it's a defined Contribution plan, which means it is a Variable Benefit plan.

The 401(k) matching is simply a company match of X% into your 401 (k). It's pre-tax dollars, which is good, but there are two limitations:
1. It's only as good as YOUR 401(k) contributions. If you skimp on the 401(k), so does the company. Having the company match $500/year in contributions gets you nowhere fast.
2. It's only as good as YOUR investment skill. If you put all of your 401(k) money into BuggyWhips.com, expect to be moving in with your parents when you turn 60.

This is probably more than you were asking for, but I hope it helps!

 

[USMC319]

Pilot141,

Outstanding post!! This subject is often misunderstood and you have explained it very well in layman's terms.