Senators Predict Ok Of Pension Relief
- Thread starter USA320Pilot
- Start date
Chip,
Does this mean that the U pilots would automatically have their pensions restored, or would it be at the discretion of U management?
Does this mean that the U pilots would automatically have their pensions restored, or would it be at the discretion of U management?
- Thread Starter
- #3
737nCH11:
H.R. 2719, the Airline Pension Act of 2003, lowers the company's pension liability and obligation, thus management is aggressively lobbying for this legislation.
I and other pilots have worked with US Airways vice president of government affairs Rosemary Murray on Capital Hill to get this legislation passed. One of the benefits of having your corporate offices near the District is the ability to easily lobby the federal government.
It's too early to tell what effect the new legislation woule have because the House and Senate have to hold a conference committee on the proposed legislation, but if the final deal is H.R. 2719 the pilots DB Plan and lump sum distribution would be restored and US Airways costs going forward would be lower.
Regards,
Chip
H.R. 2719, the Airline Pension Act of 2003, lowers the company's pension liability and obligation, thus management is aggressively lobbying for this legislation.
I and other pilots have worked with US Airways vice president of government affairs Rosemary Murray on Capital Hill to get this legislation passed. One of the benefits of having your corporate offices near the District is the ability to easily lobby the federal government.
It's too early to tell what effect the new legislation woule have because the House and Senate have to hold a conference committee on the proposed legislation, but if the final deal is H.R. 2719 the pilots DB Plan and lump sum distribution would be restored and US Airways costs going forward would be lower.
Regards,
Chip
Why USAirways threatens US Pension Plan Solvency
The US Pension Benefit Guaranty Corp. (PBGC) will this week go head to head with USAirways and the Air Line Pilots Association (ALPA) in a bankruptcy case that could encourage the insolvency of yet more retirement plans, including that of Continental Airlines.
At issue is how to assess the present value of pensions that will be paid out over the next 30 to 50 years. In this case, the PBGC is challenging settlements made to other unsecured creditors by USAirways Group, which emerged from Chapter 11 protection earlier this year.
The PBGC took over the assets of the USAirways pilots' pension plan this year, valuing the shortfall needed to pay promised benefits at $2.2 Billion. PBGC calculates that the pension plan had only 35% of the assets needed to meet its' pension obligations.
Actuaries at Towers Perrin, representing the USAirways pilots' retirement plan and other creditors say the size of the PBGC claim is overstated. Its own claculation put the size of the shortfall at about $894 Million.
The difference in the size of the two claims depends on which interest rate is used to discount future liabilities. The bigger the discount rate, the lower the net present value of the liabilities. Employers would like to use higher interest rates that show lower liabilities. Lower liabilities lead to lower required contributions, easing the strain on hard-pressed employers.
But the problems facing the PBGC are even more pressing. The insurance fund is $350 Billion short of what it projects is needed to pay all the pensions promised to current and former workers whose employers have become insolvent. If the deficit continues to grow, PBGC required insurance premiums could become so large that healthy employers (at least those not constrained by union contracts) would refuse to pay them, triggering the need for a US bailout. In essence, all taxpayers would shoulder the burden of paying benefits to the 20% of private-sector workers who enjoy the security of a defined benefit plan!
Richard Ippolito, professor of economics at George Mason University Law School in Arlington, VA, and the former chief economist for the PBGC was quoted as saying that "a victory by USAirways and its creditors could set a dangerous precedent. If you know you can bamboozle th PBGC, why not crank up your pension liabilities as much as you can before you go bankrupt?"
Current PBGC funding rules allow employers to use many different interest rates when calculating shortfalls and determining the size of required contributions. However, the one area where the law does not allow leeway is when calculating liabilities of a plan where the employer has become insolvent. There, the interest rate must match that offered by live insurers on annuities. Not unreasonable, since that is essentially what a defined benefit plan is.
Current rates on annuities are around 5%, while USAirways and its advisors argue that they can expect to return 8% on long term investments. It is this differential that gives rise to different claims.
Given that a well-run pension plan will have a mix of stocks and bonds; and, given that both bond interest rates are at all time highs and that stocks are still at highly elevated historical levels, it seems imprudent to claim that long-term pension plan returns will exceed the returns promised by insurance companies or investors with the acumen of Warren Buffet (who expects a mere 6.6% long-term pension plan return for Berkshire Hathaway subsidairy companies).
Unfortunately, as this dance plays itself out, it is clear that the public will not bail-out a perceived-to-be rich minority. A probable evolution in the PBGC rules will result in higher insurance premiums for at-risk companies in the steel and airline industries. Also, expect restrictions on lump-sum payouts, probably in the form of unfavorable discount rates for lump sum payout calculations.
In both the airline and the steel industries, a great deal of the labor cost differential between the old-line companies and their new upstart competitors can be found in their retirement funding requirements. Almost the entire pilot labor cost differential between Continental Airlines and similar-paying but low-cost Southwest Airlines is due to the CAL Pilot Pension Plan. The issue, in both of these commodity industries, is that costs are key to both survival and growth.
There's an adage in economics that applies here: "If a trend can't continue, it won't." I would argue that the predictive issue is not whether or not Defined Pension Plans persist at major airlines and other major employers, but in what way will they be eliminated or watered down to meet economic reality!
It is very probable that the junior pilots at American Airlines, who made large financial concessions to protect a very lucrative retirement plan, will live to regret their faustian bargain. Any employee who trades pay today for a continuation of future defined retirement benefits is probably burning money. Something to be considered in any ongoing discussions regarding pay and benefits.
The US Pension Benefit Guaranty Corp. (PBGC) will this week go head to head with USAirways and the Air Line Pilots Association (ALPA) in a bankruptcy case that could encourage the insolvency of yet more retirement plans, including that of Continental Airlines.
At issue is how to assess the present value of pensions that will be paid out over the next 30 to 50 years. In this case, the PBGC is challenging settlements made to other unsecured creditors by USAirways Group, which emerged from Chapter 11 protection earlier this year.
The PBGC took over the assets of the USAirways pilots' pension plan this year, valuing the shortfall needed to pay promised benefits at $2.2 Billion. PBGC calculates that the pension plan had only 35% of the assets needed to meet its' pension obligations.
Actuaries at Towers Perrin, representing the USAirways pilots' retirement plan and other creditors say the size of the PBGC claim is overstated. Its own claculation put the size of the shortfall at about $894 Million.
The difference in the size of the two claims depends on which interest rate is used to discount future liabilities. The bigger the discount rate, the lower the net present value of the liabilities. Employers would like to use higher interest rates that show lower liabilities. Lower liabilities lead to lower required contributions, easing the strain on hard-pressed employers.
But the problems facing the PBGC are even more pressing. The insurance fund is $350 Billion short of what it projects is needed to pay all the pensions promised to current and former workers whose employers have become insolvent. If the deficit continues to grow, PBGC required insurance premiums could become so large that healthy employers (at least those not constrained by union contracts) would refuse to pay them, triggering the need for a US bailout. In essence, all taxpayers would shoulder the burden of paying benefits to the 20% of private-sector workers who enjoy the security of a defined benefit plan!
Richard Ippolito, professor of economics at George Mason University Law School in Arlington, VA, and the former chief economist for the PBGC was quoted as saying that "a victory by USAirways and its creditors could set a dangerous precedent. If you know you can bamboozle th PBGC, why not crank up your pension liabilities as much as you can before you go bankrupt?"
Current PBGC funding rules allow employers to use many different interest rates when calculating shortfalls and determining the size of required contributions. However, the one area where the law does not allow leeway is when calculating liabilities of a plan where the employer has become insolvent. There, the interest rate must match that offered by live insurers on annuities. Not unreasonable, since that is essentially what a defined benefit plan is.
Current rates on annuities are around 5%, while USAirways and its advisors argue that they can expect to return 8% on long term investments. It is this differential that gives rise to different claims.
Given that a well-run pension plan will have a mix of stocks and bonds; and, given that both bond interest rates are at all time highs and that stocks are still at highly elevated historical levels, it seems imprudent to claim that long-term pension plan returns will exceed the returns promised by insurance companies or investors with the acumen of Warren Buffet (who expects a mere 6.6% long-term pension plan return for Berkshire Hathaway subsidairy companies).
Unfortunately, as this dance plays itself out, it is clear that the public will not bail-out a perceived-to-be rich minority. A probable evolution in the PBGC rules will result in higher insurance premiums for at-risk companies in the steel and airline industries. Also, expect restrictions on lump-sum payouts, probably in the form of unfavorable discount rates for lump sum payout calculations.
In both the airline and the steel industries, a great deal of the labor cost differential between the old-line companies and their new upstart competitors can be found in their retirement funding requirements. Almost the entire pilot labor cost differential between Continental Airlines and similar-paying but low-cost Southwest Airlines is due to the CAL Pilot Pension Plan. The issue, in both of these commodity industries, is that costs are key to both survival and growth.
There's an adage in economics that applies here: "If a trend can't continue, it won't." I would argue that the predictive issue is not whether or not Defined Pension Plans persist at major airlines and other major employers, but in what way will they be eliminated or watered down to meet economic reality!
It is very probable that the junior pilots at American Airlines, who made large financial concessions to protect a very lucrative retirement plan, will live to regret their faustian bargain. Any employee who trades pay today for a continuation of future defined retirement benefits is probably burning money. Something to be considered in any ongoing discussions regarding pay and benefits.
oldiebutgoody
Veteran
It is from the Financial Times dated Oct 27 by Norma Cohen. You can't access the article online unless you subscribe but just google the info and you can find it via other web sites.
Jeez, the pension fund was underfunded from the get-go, and now the Senate is contemplating lower contributions? How does that solve the problem, long-term? Sounds more like putting off the day of reckoning.
I share ALPA's outrage at being hoo-doo'd out of their pension. Been there, done that, and I freakin' HATED it.
The long-term problem was the regulatory funding requirements were inadequate to begin with. Then, in the fat years, corporations got away with making no contributions to the plans; the plans self-funded due to the bull market - this was perfectly legal, if fiscally irresponsible (irresponsible to the pensioners;great for the company's bottom line). Adding to the problems, corporations were given considerable discretion in pension calculations; they could willy-nilly decide a return of 10% in the out-years. Diesel8's post shows this dynamic at work.
I have long since concluded many corporations view pension plans as their piggy-bank; to be broken in case of emergencies.
ALPA, be VERY careful about near-term relief at the expense of long-term security.
I share ALPA's outrage at being hoo-doo'd out of their pension. Been there, done that, and I freakin' HATED it.
The long-term problem was the regulatory funding requirements were inadequate to begin with. Then, in the fat years, corporations got away with making no contributions to the plans; the plans self-funded due to the bull market - this was perfectly legal, if fiscally irresponsible (irresponsible to the pensioners;great for the company's bottom line). Adding to the problems, corporations were given considerable discretion in pension calculations; they could willy-nilly decide a return of 10% in the out-years. Diesel8's post shows this dynamic at work.
I have long since concluded many corporations view pension plans as their piggy-bank; to be broken in case of emergencies.
ALPA, be VERY careful about near-term relief at the expense of long-term security.
Well, If I read Chip correctly, U ALPA wants this to succeed, since it will allow U to decrease the burden on the pensionfunding and thereby lower cost.
From what I read, UAL management would like to see it as well, since their pension is underfunded, however, those companies who have maintained adequate funding or are looking at ways to keep it funded, will, if this passes, be given respite. How that will affect solvency in the future is to be seen, but it could be really bad news, if a close eye is not kept on DB's.
From what I read, UAL management would like to see it as well, since their pension is underfunded, however, those companies who have maintained adequate funding or are looking at ways to keep it funded, will, if this passes, be given respite. How that will affect solvency in the future is to be seen, but it could be really bad news, if a close eye is not kept on DB's.
oldiebutgoody
Veteran
Since it's a "defined benefit" plan, the only issue at the time of retirement is the level of benefit earned. Any amount which is NOT in the fund would have to be paid from other company money (providing, of course, that the company remains solvent). For guys recently retired or retiring soon this provides a HUGE improvement over the present retirement. I believe that even if this refunding plan is approved that the PBGC will require higher levels of funding in the future, using more realistic interest and compounding rates.
