More Good News: Defined-Benefit Plans

[SpeedBird]

Anyone who still works for an airline with a DB pension plan needs to read this Business Week link...the hits just keep on coming!

http://www.businessweek.com/magazine/content/04_29/b3892001_mz001.htm

 

[Draginass]

If you're an airline pilot and are counting on getting an A or B fund at retirement and you're not going to retire in a year or two, you need to be worried . . . . very worried. If you're not, you don't understand what's about to hit you in the back of the head.

 

[chase]

Defined Benefit Plans & the Age 60 Rule

I have heard from sources that senior ALPA officials were recently quoted as saying what this article basically implies...defined benefit programs are dead & are no longer a viable option for retirement planning purposes by ALPA pilots.

Talks are supposedly occurring between ALPA officials & others in the industry to help relieve this problem for retiring pilots. The argument goes like this:

Since DB plans are declining in value, the only way for retiring pilots to gain back some of this value is to move the retirement age to something beyond age 60. The financials are too siginificant for ALPA to continue its opposition to such a simple partial fix to the problem. There aren't other meaningful solutions out there to find the necessary money to help pilots who are now facing retirements with much smaller retirements checks or will so in the future if LCC find themselves having to cut pension payments or payouts overall.

This shift will result in ALPA coming out next congressional term in support of extending the age to beyond 60 all under the guise of pilots finding creative solutions to the financial crisis airlines face. The shutting down of these DB plans could be parlayed into greater contributions to 401K programs that will benefit younger pilots who will be hurt by delays in reaching the left seat but will receive the greater benefit of having more money added to the their 401K program than is currently contributed by LCC. Since there wouldn't be any pension plans for these young folks anyway (& possibly no company either if the burden of debt to the LCC isn't reduced greatly, partially by removing the continuing contribution requirements that DB require), why not trade the support of Age 60 into more money into a 401K program for all pilots...still less in real dollars than the current contribution requirements of DB plans.

Just my $.02 & what I have heard on the street. cheers,

 

[Singlecoil]

How many people think interest rates are going to go down in the future? As interest rates rise, DB plans will once again become viable. The higher the interest rates, the lower the value of lump-sum options, and the greater the power of compounding interest to shore up the funds.

Just when everyone says they are doomed is when they will turn the corner.

 

[jp1030]

For all those who have a DB,

Defined benefit plans are wonderful, or so I thought. We had one of the best DB plans in the industry until we went into BK. Just to give you an idea what your facing if your company decares bankruptsy.... I was 44 when the plan was terminated, instead of 60% of my highest W2 (the best 3 in the last 10), I will, if I'm lucky and the pbgc remains solvent, retire with 27K a year.
If I were a UAL or DAL pilot or any other company with a DB plan I wish you the best of luck. Once the plan is terminated your retirement will be worth about as much as social security.

JP

 

[FLB717]

Thats why in our last contract we went for a 10.5% B-Fund (401B match's 10.5% of your gross wage). It's just a mirror image of your 401K. The company writes the check and they are done. Quick easy and it the company changes the money is still ours to loose in the markets. I for one would rather have an increase in the B-Fund than ever have a DC plan.

 

[Singlecoil]

During the roaring late 90's the companies didn't have to put a dime into DB plans, because their investments were doing so well. Now they are complaining when the tide turns and they have to contribute to keep them fully funded. Under a B plan, the company has to contribute every year. As long as there is steady growth and interest rates aren't too low, I bet the overall contribution from the company is less under a DB plan than it would be under a generous (10%) 401K.

 

[SpeedBird]

Singlecoil,

Seriously, do you really believe that this is the cause of the problem and therefore will fix itself with a better stock market and higher interest rates? The article discusses this as part of the problem but it is far more complicated than that and if you're a potential recipient of a DB plan you may to read that article again.

 

[Singlecoil]

From the article:

"THE PERFECT PENSION STORM
Three years of stock market declines plus record-low interest rates have left pension funds woefully underfunded

One reason companies have hit the accelerator on dumping their benefits is because of sharp price increases. Retirement plans have become radically more expensive in the past two years alone. Due to smoothing mechanisms built into pension accounting, their investments are still suffering from the equity market declines of 2000, 2001, and 2002. That has put a big dent in the value of their stock holdings, generally 60% or more of their total assets. At the same time, interest rates, which are used to calculate the size of a company's liability, have remained stubbornly low, implying a bigger pension liability. Although the recent legislation eases the problem somewhat, it doesn't nearly close the gap between what these funds owe and what they have in assets."


I'm saying that just like the looming threat of deflation that we were hearing as little as six months ago, in a couple of years we won't be hearing Chicken Little, I mean management, complain about how the sky is falling. Is there a real long term shift occurring here, or is it a perfect storm that can be weathered? Is management using this as an excuse to rid themselves of these costs?

"Donald E. Fuerst, a retirement actuary at Mercer Human Resource Consulting LLC, notes that while even a well-matched 401(k) often costs no more than 3% of payroll, a typical defined-benefit plan can cost 5% to 6% of payroll."
A well-matched 401K costs no more than 3% of payroll? I wonder who's interests this guy is representing? What utter bull$hit. Get it up to around 12% and then we're in the ballpark. Where I work, it is impossible for a 401K to equal what our DB is worth, due to the annual contribution limits imposed by the feds. 14% from the company comes close for a 25 year employee. I would accept a few points less than that since a 401K is untouchable in a bankruptcy; it is my money. That is worth something. But get out of here with this 3% nonsense.

The article goes way into our aging population, which doesn't apply all that much to airlines. Sure that is a real problem for social security. As long as more and more young wage earners were entering the system, it would always be solvent. A defined benefit plan is different. It relies on the company making regular contributions to a fund that earns at least a certain rate of return. It shouldn't matter if the company will employ less or more workers in the future, as to what your retirement benefit will look like.

My bull$hit annunciator starts flashing red when I hear the sky is falling on these plans. Perfect storm? Yes. Brand new Horizon? Nope.

The problem was 9/11. People stopped travelling and the stock market crashed. Revenues plummetted, and suddenly the airlines were required to make extra large contributions to the DB plans to make up for the investment losses. Not a good situation. Will that situation continue indefinitely? I don't think so, but what do I know?

 

[320AV8R]

I have heard from sources that senior ALPA officials were recently quoted as saying what this article basically implies...defined benefit programs are dead & are no longer a viable option for retirement planning purposes by ALPA pilots.

From all the information I have heard at ALPA meetings & mailings, this is not the case.

Talks are supposedly occurring between ALPA officials & others in the industry to help relieve this problem for retiring pilots. The argument goes like this:

Since DB plans are declining in value, the only way for retiring pilots to gain back some of this value is to move the retirement age to something beyond age 60.....

I'm not sure what "problem" the retiring pilots have. Sure, the market went down & the pension fund is worth less. PBGC Statutes states that specific funding levels must be met, hence the crunch on the airline to fund the plan. Pension Legislation is clear in retiree benefit calculation. The overall value of the fund is not related to the retiree's benefit. The earned benefit can not be reduced below what has already been earned.

ALPA is negotiating a CHANGE to the TYPE of plans offered; i.e. shifting the FAE calculation to a lower percentage, with a Defined Contribution optio, etc... This would ease the funding burden on the Company, but the benefit level would remain unchanged.