Defined Benifit Pensions, The Pbgc

[Connected1]

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.

[post="282186"][/post]​

Plan assets are measured at their market value as your own investment portfolio would be. That is not an actuarially determined number. There is actually $7.3 billion sitting around somewhere in an account that is managed by Bill Quinn of AMR Beacon. He has managed to earn better than 10 percent returns through some lean years, but like I said that is not an assumption - it's actual performance.

The company must assume a rate of return for the purpose of calculating pension expense (which itself is a fantasy number - it is not the same thing as pension contributions) but because of the way GAAP accounts for pensions it has nothing to do with calculating how well the pensions are funded.

 

[Connected1]

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.

[post="282187"][/post]​

I agree with everything you say here except for the underlying assumption that dollars contributed sooner are better than dollars contributed later. The biggest reason why AMR's pensions are underfunded in the first place is the underperformance of asset returns as a result of the tech bust. Your statement assumes the market only goes up. We all know that it goes down as well. Therefore, I would argue that dollars contributed closer to the time of benefit payment are less risky even if they are more "expensive" to the company (I put that in quotes because I don't necessarily agree with you there either, but that's a discussion for a financial management board.).

My contention is that if Congress is acting on behalf of the pension beneficiaries, then it would be in everyone's best interests to give the sponsoring company the flexibility to spread out catch-up contributions. There is no sense in bankrupting a company because a legislator has decided that the money needs to sit in an account for 15 years before it can be considered real.

 

[Wretched Wrench]

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.

[post="282186"][/post]​

Exactly. I would go farther and say that any statement that does not disclose the assumed rate of return is an intentional lie.

At the minimum, it is a half-truth, with the intent to deceive.

 

[Oneflyer]

Exactly. I would go farther and say that any statement that does not disclose the assumed rate of return is an intentional lie.

At the minimum, it is a half-truth, with the intent to deceive.

The assumed rate of return is 9% as noted in the 2004 AMR annual report page 33.

 

[Wretched Wrench]

The assumed rate of return is 9% as noted in the 2004 AMR annual report page 33.

[post="282203"][/post]​

Thank you for finding it for me. I missed it.

 

[eolesen]

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.

[post="282188"][/post]​

Privatization of Social Security essentially puts everyone into a 401K plan.

AA"s lobbying on pension reform has centered around allowing us to keep our DB plans intact and not be forced into offering a 401K. You might want to spin things into thinking it's just to allow the plans to be underfunded and at risk, but would you rather have a live plan that can still accept contributions, or a plan that is frozen in its underfunded state?....

Seems to be the same battle to me.

 

[TechBoy]

Plan assets are measured at their market value as your own investment portfolio would be. That is not an actuarially determined number. There is actually $7.3 billion sitting around somewhere in an account that is managed by Bill Quinn of AMR Beacon. He has managed to earn better than 10 percent returns through some lean years, but like I said that is not an assumption - it's actual performance.

The company must assume a rate of return for the purpose of calculating pension expense (which itself is a fantasy number - it is not the same thing as pension contributions) but because of the way GAAP accounts for pensions it has nothing to do with calculating how well the pensions are funded.

[post="282195"][/post]​

To the extent that AMR can get a return greater than their 9% assumed rate, then their underfunding will shrink that much faster. But 9% is a high rate of return these days. Most plans are in the process of lowering their rate of return to 7.5% or so. Maybe AMR has had 10% returns in certain years, but they wouldn't be underfunded if they hadn't missed their assumed rate for a number of years. So their actual performance has clearly NOT met their assumed rate.

There are a few universities with large endowments (notably Yale) that have averaged double digit returns including both the boom and bust years. However, I am not aware on any pension fund that has replicated that high a return on a consistent basis. If AMR is able to achieve that, bravo, and they will be able to reap the benefit of lower future contributions. But if I were an AMR employee, I wouldn't be counting on that for my retirement. I'd want the plans to be funded appropriately.

 

[Connected1]

Maybe AMR has had 10% returns in certain years, but they wouldn't be underfunded if they hadn't missed their assumed rate for a number of years.

[post="282355"][/post]​

Absolutely correct. Their 10-K shows that the vast majority of their underfunding is due to underperforming asset returns (although I don't have the data in front of me, I would guess that this came from the 2000-2002 timeframe). Outside of the tech bust, AMR has enjoyed the benefit of better asset returns - thereby allowing them to play catch-up. AMR also continues to make catch-up contributions.

 

[Wretched Wrench]

Stocks rebound, but pensions haven't



http://www.usatoday.com/printedition/money...nded_18.art.htm

 

[Wretched Wrench]

US Senate panel to work on pension bill next week


The pensions of struggling U.S. airlines would be dealt with "more strictly" than those carriers hoped in legislation to be introduced soon, the chairman of the Senate Finance Committee said on Tuesday.

http://yahoo.reuters.com/financeQuoteCompa...19264313_newsml

 

[Wretched Wrench]

Senate Pension Bill Would Help Legacy Airlines. PBGC contribution would go from $19 to $30 per employee per year. U.S. commercial passenger airlines would have 14 years to pay off billions of dollars in pension funding shortfalls under a proposal unanimously approved Tuesday by the Senate Finance Committee.
:

http://www.marketwatch.com/news/story.asp?...%7D&siteid=yhoo