Originally Posted by
KC10 FATboy
Under ERISA law and IRS rules, in a standard termination of a 100% funded defined benefit pension plan (like ours), every participant receives 100% of their accrued benefit, with no reductions.The plan’s assets cannot be used for company costs like general operations, salaries, or debt repayment. Pension assets are held in trust exclusively for participants’ benefits, and diversion for non-benefit purposes is prohibited by ERISA. The union can’t negotiate away the money, the company can’t take it
Assuming a pilot starts at $200,000 a year and gets a 3% pay raise every year, the company must contribute a minimum 20.1% of the pilot’s final-year salary (approximately $84,300 annually, escalating with salary, to the 401k for 25 years at 7% return to provide $130,000/year in retirement using the safe 4% rule withdrawal rate.
That exceeds the current IRS 415c overall annual addition limit of $70,000 per year.
We already receive 9%. To replace the defined pension and receive our already earned 9%, a new hire who can work 25 years would need minimum 29% with cash over the 415c cap.
Warning public math. Public retirement calculators used.
Sorta kinda true. In a voluntary termination, typically the rules require more than a simple 100% funding because of ancillary administration fees and costs. 108-110% is the usual benchmark.
Termination cash payouts are very, very problematic for the reasons you describe. It all becomes a very large taxable event and there is significant maneuvering required to get to a place where it may not be. The other issue is political. No matter how many words you use, no matter how much math you show, people who get the less than average checks are going to be furious over that fact, and no amount of explanation will satisfy them. You can roll the proceeds into an annuity, but you're trading the risk of the airline to the risk of a relatively uninterested 3rd party.
ERISA funding is a wonky thing. Plans can go years without making a contribution, because reasonable, conservative returns and reasonable interest rates (~5-6%) generate enough returns for a plan to be self funding after a period of time. By that same token, if the long term interest rates go south, and stay there for a while (say, like 2009-2021), your plan sponsor is forced to make very large contributions regardless of the actual plan return. I can't emphasize enough that if your plan gets behind the interest rate power curve, those numbers get really big, really fast. They did change the rules to allow for a more realistic interest rate assumption (PPA), but I think only NWA managed to freeze their pension under those rules, rather than outright distress termination.
What sunk the majors' pensions in the 00's wasn't the just the lost of value of the assets of the plans. Plan values recover over time. It was the collapse of the interest rates used for the ERISA funding model, and the combination of the two put them in a very high contribution requirement just at the time they didn't have the money to do so. ERISA (at the time) didn't permit the flexibility to allow plan assets to recover, or flex on the interest rates so that bill was due immediately. It's basically like having a pile of savings, losing your job, and your bank calls your mortgage. "Well I have savings I can pay the mortgage with while I look for a job" and the bank says "we don't care, pay the whole thing now".
My guess is your management knows this, and doesn't want to be left in the position of holding the bag when interest rates go south again (and they will). Ironically, in a stable market, DB plans actually cost significantly less than DC plans, because of the self-funding aspect. But the "stable market" departed the fix back in 2008, and I seriously doubt we'll ever see it return.
Don't get me wrong, I'm a big fan of DB/Annuities for a portion of a retirement portfolio. Unfortunately the past 15 years have conditioned people to easy money and a never ending upswing in the market, so it's essentially free money. While the market does increase with time on a macro level, if you have to retire into one of the micro level dips, you can find yourself in a not great position.