the back story
Sent: Tuesday, September 20, 2005 6:04 PM
Subject: Chairman's Letter - September 20, 2005
September 20, 2005
Dear Fellow Pilot,
Your union has been planning for all contingencies while trying to remain
realistic about a very difficult business environment.
Part of our preparation was evaluating the funded status of our qualified
defined benefit retirement plan. In July, we hired an outside actuary and
consulting firm, The Segal Company, to augment our MEC and ALPA retirement
and insurance experts. On July 30, we requested that Segal be given access
to the plan's actuaries, Towers Perrin, to independently assess and value
the plan.
Management responded on August 1 that we could have access to the plan data
with a management representative present. We agreed to this ground rule,
with the further understanding it would not slow down the analysis. To get
the process moving, on August 7, ALPA provided a list of data needed from
Towers Perrin. The list was substantial and the company informed us they
would provide the data in three stages. The initial data came on August 22,
the second stage arrived on September 2, and we are waiting for a last, but
important segment of information.
On September 1, management informed us that the number of early retirements
during the year has placed ever-increasing pressure on the plan's funding
level. Upon further examination, this pressure comes from three sources:
* Accumulated lump sum payments from the plan
* The mandated interest rate assumption used to determine plan liabilities
* Past investment performance of the plan's assets
Approximately 1,000 pilots have retired in the last year and over 2,300
since January 2003. Most of these have been early retirements. First, the
associated lump sum payouts have had a direct impact on plan assets.
Second, the interest rate used to determine the plan's liabilities decreased
on July 1, increasing the sum of the plan's liabilities. Last, the
historical (5-year) investment performance of the plan, that is used to
"smooth" the asset value, lost the positive stock market returns of July
1999 to June 2000, thereby decreasing the actuarial asset value.
The Tax Code determines the minimum required contributions the Company must
make to the plan. A special contribution is required in the event the plan
experiences a "liquidity shortfall." This occurs when an amount equal to
three times the adjusted total of lump sum benefits, annuity benefits and
expenses that are paid out over a four-quarter period exceeds the plan's
assets at the end of any quarter. In that event, the employer must make an
additional contribution, known as a "liquidity shortfall contribution,"
equal to the difference, 15 days after the end of the calendar quarter. If
the employer fails to make the liquidity shortfall contribution, the plan is
prohibited from paying lump sums unless and until the plan no longer has a
liquidity shortfall. Whether a plan has, or continues to have, a liquidity
shortfall is determined as of the end of each calendar quarter.
On September 1, management informed us that the lump sums payable to the 202
pilots who retired September 1 will create a liquidity shortfall (as defined
above) and trigger a liquidity shortfall contribution. If the company fails
to make this required contribution, the plan will be prohibited from paying
lump sums unless and until a future quarterly calculation reveals that the
plan no longer has a liquidity shortfall. The timing of this prohibition
will depend on when the lump sums are paid to the September 1 retirees.
Towers Perrin has determined that if all the lump sums for September 1
retirees are paid in the month of September, then the plan will have a
liquidity shortfall as of September 30. This would trigger a liquidity
shortfall contribution, due on October 15, and the plan will be prohibited
from paying any lump sums for pilots retiring October 1 and beyond unless
the Company makes the required contribution or a future quarterly
calculation reveals that the plan no longer has a liquidity shortfall.
Conversely, if none of the lump sums for September 1 retirees are paid until
October, then the plan will not have a liquidity shortfall as of September
30, no liquidity shortfall contribution will be due October 15, and lump sum
payments could continue through the next quarter. In that case, however,
the plan assets will be reduced by future lump sum payouts, likely leading
to a liquidity shortfall as of December 31. At this time, the Company has
stated that it intends not to make upcoming plan contributions.
Historically, retiring pilots have received their lump sum payouts in
approximately 4-5 weeks. Management today is faced with the dilemma of when
to pay the September 1 retiree lump sums. Although this is the plan
Administrative Committee's decision, the Committee decided to turn this
decision over to an outside group. They have hired Fiduciary Counselors,
Inc., as an independent fiduciary, to make the decision for them.
There are at least four possible scenarios for Fiduciary Counselors, Inc.'s
decision:
1. Pay all lump sums in September
2. Pay enough lump sums in September to trigger a liquidity shortfall as of
September 30
3. Pay all lump sums in October
4. Allow the lump sums to be paid on a normal basis.
The first scenario obviously affects the September 30 quarterly calculation,
and unless the Company makes a large liquidity shortfall contribution on
October 15, future lump sum payouts would be suspended unless and until a
future quarterly calculation reveals that there is no longer a liquidity
shortfall. The second scenario also affects the September 30 quarterly
calculation, and unless the Company makes a small liquidity shortfall
contribution, future lump sum payouts would be suspended unless and until a
future quarterly calculation reveals that there is no longer a liquidity
shortfall. The third scenario would seem to preserve lump sum payouts at
least until the end of December. The fourth scenario may leave the outcome
uncertain until on or after September 30, and would leave pilots
contemplating early retirement on October 1 with great uncertainty as to
whether their lump sums will be available.
If lump sum payments are suspended, and a future quarterly calculation
reveals that there is no longer a liquidity shortfall, then lump sum
payments will resume. In that case, lump sum payments will be made not only
to future retirees, but also to each pilot who had previously retired and
elected a lump sum but was not paid a lump sum due to a liquidity shortfall
(their lump sums will be adjusted for monthly payments made in the interim).
At the very least, pilots contemplating retirement effective on or after
October 1 need to understand there is a significant likelihood that a lump
sum payment will not be available upon their retirement.
Fraternally,
John Malone