pilot141
Professional Cynic
- Joined
- Nov 26, 2001
- Posts
- 274
The reason that UAL, U, DAL, NWA and others are all underfunded on their pensions is readily available, and it has NOTHING to do with who held the Oval Office.
First of all, some education: there are two types of pensions that airlines pay into: the defined benefit plan (aka A fund) and the defined contribution plan (aka B fund). Think of the B fund like your 401(k) except paid for by the airline: every month, x% of your pre-tax earnings goes into the fund. The airline knows this, budgets for this, and makes the payments every month. They know that hiring another pilot entails the B-fund cost, so the numbers are already crunched (ie you may think that your 2nd year pay is $60K, but the airline knows to budget $80K for it to cover medical, SSA and the B-fund).
The A-fund is a different story. It's a defined-benefit plan, meaning that the airline promises to pay out a certain amount in future years based on your time in service, highest paying years, etc.
The following is a simplified version of what happened:
The airlines use investment funds (simlilar to mutual funds) for their A-fund money. They put money in and use the growth of the investments to help out, hopefully minimizing future payments. During the late 90s the A-fund money grew so fast that the airlines stopped contributing entirely, relying solely on growth to sustain the payments. This worked for a few years, until the tech bubble burst. The pension funds got caught with their pants down, and instead of earning money they now were losing money. The airlines, which for the past few years had been cruising with NO pension payments were suddenly looking at huge cash infusions to make up for the capital losses. Six months later we get 9/11, and the airlines' finances collapse.
Instead of the pension funds being money-makers, they are now huge money-drains.
If the pension fund managers had been slightly more responsible and invested in say, bonds instead of Pets.com, the problem might not be as bad as it is today.
One reason that AA is doing better than the others these days is that the union (yes, the hated "rabble-rousers") put limits on what investments the pension fund could select, and ended up hugely limiting the losses.
Now as to letting these companies dump these obligations.....that is another topic!
First of all, some education: there are two types of pensions that airlines pay into: the defined benefit plan (aka A fund) and the defined contribution plan (aka B fund). Think of the B fund like your 401(k) except paid for by the airline: every month, x% of your pre-tax earnings goes into the fund. The airline knows this, budgets for this, and makes the payments every month. They know that hiring another pilot entails the B-fund cost, so the numbers are already crunched (ie you may think that your 2nd year pay is $60K, but the airline knows to budget $80K for it to cover medical, SSA and the B-fund).
The A-fund is a different story. It's a defined-benefit plan, meaning that the airline promises to pay out a certain amount in future years based on your time in service, highest paying years, etc.
The following is a simplified version of what happened:
The airlines use investment funds (simlilar to mutual funds) for their A-fund money. They put money in and use the growth of the investments to help out, hopefully minimizing future payments. During the late 90s the A-fund money grew so fast that the airlines stopped contributing entirely, relying solely on growth to sustain the payments. This worked for a few years, until the tech bubble burst. The pension funds got caught with their pants down, and instead of earning money they now were losing money. The airlines, which for the past few years had been cruising with NO pension payments were suddenly looking at huge cash infusions to make up for the capital losses. Six months later we get 9/11, and the airlines' finances collapse.
Instead of the pension funds being money-makers, they are now huge money-drains.
If the pension fund managers had been slightly more responsible and invested in say, bonds instead of Pets.com, the problem might not be as bad as it is today.
One reason that AA is doing better than the others these days is that the union (yes, the hated "rabble-rousers") put limits on what investments the pension fund could select, and ended up hugely limiting the losses.
Now as to letting these companies dump these obligations.....that is another topic!