Defined Benifit Pensions, The Pbgc

[NewHampshire Black Bears]

<_< I believe the critical date to be aware of is Oct.17th, of this year. On that date the rules of this game changes drasticaly! Whether NW, and, or, Delta go into BK in Sept., to dump their retirements before the change, will tell how much pressure will be put on Congress for pension reform! At this point I don't believe aa will go that route due to the new regs that will go into effect. I believe they are banking on the government to come up with some significant relief for the Airline Industry in the form of an extension of payments! Just one man's opinon!!! :unsure:

[post="281838"][/post]​

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MCI,
THAT post (seriously) !!!, was one, if not "THE" best of your memorable time, spent on this web site !!!!!!!!

NH/BB's

 

[Wretched Wrench]

AA will probably not go bankruptcy in Sep, but if Delta and Northwest do, AA will be left at a tremendous economic disavantage, and will likely gut the pension plans.

At least the pension plans for the rank and file.

 

[TechBoy]

Whether a DB pension plan is "fully funded" or "underfunded" is largely a guessing game. Significant assumptions are made in the calculations -- largely what long term investment returns will be. The 1982-2001 secular bull market produced investment returns that were far off historical returns and are unlikely to be repeated in the near future. During this bull market as returns consistently exceeded expections, pension managers continually increased their expected rate of return. The higher expected rates created "fully funded" or "overfunded" situations and led many companies to stop contributing cash to their funds. Not a problem as long as higher than normal returns kept coming in. But the 2001 bust wiped out some of that gain, but that is also not an unusual event. The real issue is that the pension managers are now forced to lower their expected future returns back down to normal levels which creates an "underfunded" situation in many plans.

Realistically, no competant pension manager can expect their investments to return to the huge returns of the 1990s. Long term historical equities returns are in the 8-9% range and long term historical bond returns are in the 4-5% range. So what is really happening here is that companies are making up for all the skipped (or lower) contributions of the 1990s.

This is why DB plans have become so unpopular. The company takes on huge risk and the employee takes none. That is, as long as the company is solvent.

 

[Wretched Wrench]

Whether a DB pension plan is "fully funded" or "underfunded" is largely a guessing game.  Significant assumptions are made in the calculations -- largely what long term investment returns will be.  The 1982-2001 secular bull market produced investment returns that were far off historical returns and are unlikely to be repeated in the near future.  During this bull market as returns consistently exceeded expections, pension managers continually increased their expected rate of return.  The higher expected rates created "fully funded" or "overfunded" situations and led many companies to stop contributing cash to their funds.  Not a problem as long as higher than normal returns kept coming in.  But the 2001 bust wiped out some of that gain, but that is also not an unusual event.  The real issue is that the pension managers are now forced to lower their expected future returns back down to normal levels which creates an "underfunded" situation in many plans.

Realistically, no competant pension manager can expect their investments to return to the huge returns of the 1990s.  Long term historical equities returns are in the 8-9% range and long term historical bond returns are in the 4-5% range.  So what is really happening here is that companies are making up for all the skipped (or lower) contributions of the 1990s.

This is why DB plans have become so unpopular.  The company takes on huge risk and the employee takes none.  That is, as long as the company is solvent.

[post="281961"][/post]​

This is all quite true. Many companies used the assumptions of higher returns to justify the intentional underfunding of the pension funds. It was like free money to to them. Spend now and let the employees pay later.

But this was not a "guessing game" as your first statement would indicate. It was all very calculated. They knew exactly what they were doing. And they were allowed to get away with it.

If an executor of a trust fund or estate did that, they would be subject to legal action as having commited a breach of fiduciary trust.

 

[NewHampshire Black Bears]

Speaking of airlines who are in BK ...AND have "dumped" their DBP plans, I know of 2, who come this week when it's time to report 2nd qtr earnings, are NOT anywhere near reporting a profit !!! (AND these CLOWNS have been in BK since gasoline was $1.50 for Regular)

AA does NOT fall into THAT catagory !!

My point :

BK is not a sure fire "instant road" to $$$ success !!!


HHMMMM !

NH/BB's

 

[MCI transplant]

+++++++++++++++++++++++++++++++++++++++++++++++++++++

MCI,
THAT post (seriously) !!!, was one, if not "THE" best of your memorable time, spent on this web site !!!!!!!!

NH/BB's

[post="281933"][/post]​

<_< Thank you Bear! I believe my spelling is getting better too!!!!! 😛

 

[MCI transplant]

AA will probably not go bankruptcy in Sep, but if Delta and Northwest do, AA will be left at a tremendous economic disavantage, and will likely gut the pension plans.

At least the pension plans for the rank and file.

[post="281935"][/post]​

<_< This may be true, but at least they won't be doing it through the BK court! Hopefully that road has been blocked!!!! With the new BK regs that are going into effect on Oct. 17th., it will just make it that more difficult to do!!!!

 

[Boomer]

Hold on a second.... Current law -requires- disclosure to plan participants. It's available to you on request, and it's also provided to the general public.

If you go thru the SEC 10K filings over the years, the information on present contributions, expected contributions, and investment rate of return assumptions is all there.

Wall Street analysts had been warning about the pension situation at UAL before it even happened, so it is by no means privileged, and thanks to Edgar, it is available to anyone with a web browser and the time to read thru the filings.

The current crisis with DBP's is tied to the tech stock bubble burst as much as anything else. When interest rates, stock performance, etc. all collapsed in 2001, the investments supporting DBP's -and- 401K's no longer were getting the same rates of return.

Many of us saw our 401K's value drop by 10-20%, and didn't think twice about it (aside from being pissed off about the losses). The difference is that with the 401K, there's no way to make up for the investment shortfall, while with the DBP's, the company is required to make up for the investment shortfall.

AMR, DAL and CAL have been making up for the investment shortfalls with cash out of corporate revenues, which is what is required by law. NWA made up for part of their shortfall with the value of the stock from Pinnacle's spin off, but only after getting approval from the government. UAL simply didn't do anything.

Those are huge differences...

[post="281559"][/post]​

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From your words, Former ModerAAtor:

"Hold on a second.... Current law -requires- disclosure to plan participants. It's available to you on request, and it's also provided to the general public.

If you go thru the SEC 10K filings over the years, the information on present contributions, expected contributions, and investment rate of return assumptions is all there."

The current law requires disclosure to plAAn pAArticipants. The Federal Law allows the compAAny to withold the accounting principles used to determine plAAn funding.

Soo, while a pAArticipant may request a funding status: the compAAny sponsoring the DBP is NOT REQUIRED TO FURNISH THAT INFORMATION.

As I've said, there is no proof that AMR has used any of the schemes utilized by UAL: but, AMR has not provided that information to the plAAn pAArticipents either.

 

[Connected1]

Soo, while a pAArticipant may request a funding status: the compAAny sponsoring the DBP is NOT REQUIRED TO FURNISH THAT INFORMATION.

[post="282147"][/post]​

Luckily, we work at a company that furnishes the information in their annual report (Note 10 of last year's 10-K). At the end of 2004, AMR's projected benefit obligation was $10.0 billion while the fair value of their plan assets were $7.3 billion. So, as of 12/31/2004, the company's pensions were 73% funded. After a few contributions and some good investment returns in 2005, the company's pensions are now about 80% funded according to Arpey and the union presidents.

80% funding is actually quite good considering the nature of the projected benefit obligation. The PBO equals the present value of the already accrued pension benefit for each employee, plus an assumed amount for future benefit accrual based upon expectations for salary increases and length of service at the company. Consequently, almost $1.0 billion of the PBO hasn't even been earned yet by the employees (calculate this yourself by subtracting "accumulated benefit obligation" from "projected benefit obligation"). Moreover, an even larger amount of the PBO won't even be paid for 15-20 years. Why? The present value of accrued pension benefits for less senior employees is also included in the PBO. The company has a long time to catch up before that bill comes due.

The company is actually a bit overfunded if you compare current plan assets to the benefits that are scheduled to be paid over the next 15-20 years. That's why Arpey and the unions are pushing to get Congress to ease restrictions on catch-up contributions. Why should we have to catch-up over the short span of 3 years if that money is just going to rot in the pot for another 12-17 years after that?

 

[Wretched Wrench]

oops. 🙁

 

[Wretched Wrench]

Why should we have to catch-up over the short span of 3 years if that money is just going to rot in the pot for another 12-17 years after that?

Perhaps the fund managers could find something better for the money to do than "rot in the pot". Isn't that what fund managers do? The term (and dictum) "fiduciary responsibility" comes to mind.

The phrase does roll off the tongue nicely, though.

 

[TechBoy]

Luckily, we work at a company that furnishes the information in their annual report (Note 10 of last year's 10-K). At the end of 2004, AMR's projected benefit obligation was $10.0 billion while the fair value of their plan assets were $7.3 billion. So, as of 12/31/2004, the company's pensions were 73% funded. After a few contributions and some good investment returns in 2005, the company's pensions are now about 80% funded according to Arpey and the union presidents.

[post="282169"][/post]​

Yes, but what is the assumed rate of return on plan assets? That is the key number here. If you assume a 10% rate of return, then even UA's plans look well funded. But at 7-8% things look different. I don't know what AMR assumes and if they don't release that figure publicly, then any statement about 80% funding is meaningless.

 

[TechBoy]

The company is actually a bit overfunded if you compare current plan assets to the benefits that are scheduled to be paid over the next 15-20 years. That's why Arpey and the unions are pushing to get Congress to ease restrictions on catch-up contributions. Why should we have to catch-up over the short span of 3 years if that money is just going to rot in the pot for another 12-17 years after that?

[post="282169"][/post]​

This is true of most underfunded plans. It's a little like saying that you have enough money in your 401k to pay for 10 years of retirement. That doesn't mean that you don't need to keep saving to get the money needed for the entire retirement. The same is true of the AMR plans. That is why the feds require that underfunded plans make contributions to make up the underfunding. Remember that AMR will need to make additional contributions in most future years to make up for future earned benefits even after they make up for the current underfunding.

Taking 12-17 years to make up the underfunding means that the plans do not get the income from that money for over a decade and reduces long term plan solvency. There is no such thing as a free lunch.

 

[TWU informer]

Well if those projections are based on an assumed return on investment.

Then you are in for a rude awakening.

I find it interesting that the liberals and unions fight against privatization of Social Security because of the "risk" in investing for one's futures, yet they go to Washington D.C. and together with Corporate Executives lobby to insure that our DB Plan continues to be at risk and underfunded.

That makes very little sense to me, but I have been called stupid before too.

 

[Connected1]

Perhaps the fund managers could find something better for the money to do than "rot in the pot". Isn't that what fund managers do? The term (and dictum) "fiduciary responsibility" comes to mind.

[post="282183"][/post]​

From a beneficiary's standpoint, it doesn't matter whether the money comes from asset returns or spread-out contributions so long as the money is there when it comes time to pay. In either scenario the company is being equally fiduciarally responsible.