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?
