DLax85

Updating my own post here with more current asset allocation ranges provided by Fedex retirement plan.

Since 2015, the Fedex retirement allocation has averaged a more conservative 40% Stock / 60% Bond asset allocation.

Applying this 40/60 asset allocation to the Vanguard 10 year forecast of:
Equities ~ 3.9% - 5.9% (Mean 4.9%)
Bonds ~ 0.7% - 1.7% (Mean 1.2%)'

Yields forecast range of 1.98% - 3.38% (Mean 2.68%)

Don't like Vanguard, how about Schwab's latest forecast in their retirement tools (...the preferred investment advisor to ALPA pilots!):

(...Admittedly, their forecast is a little more optimistic than Vanguard, but still yields a return less than the 5% hurdle rate assumed in the VBP Modeler...)

Equities ~ 6.5%
Bonds - 2.55%

Yields a 40/60 forecast of - 4.13%

And yes, while the Retirement plan itself is estimating a 6.5% Estimated Return on Assets, the plan has a long history of lowering their expectation steadily over the past 20 years. From a high of 10.9% in 2000.....to 10.10% in 2003....to 9.10% in 2004...to 8.5% in 2008....to 8.0% to 2010....to 7.75% in 2014...to 6.5% in 2016.

My guess, due to the move to a more conservative asset allocation and the long term reduction in forecast in bond market returns, the fund will be forced to lower their EROA even lower.

Negotiating a fixed "hurdle rate" in any CBA would truly be a fool's errand!

kronan

Having the hurdle rate allows the Trust to continue to gain in value without passing that value on to US. It acts as a stabilizing source for down years.
IOW-the value of your pancakes never grows beyond the 2% Accumulation rate if the 4.13% ROI is the new normal for the next 25 years.

IMO-eliminate the Hurdle Rate would also mean eliminating the Floor value. Which wouldn't be an issue if the ROI on our Trust was always positive, but that's not the way I'd prefer to bet

DLax85

I’m genuinely confused by your post. What’s your understanding of how a “hurdle rate” works within a Variable Benefit Plan?

What do you believe happens to the value of a pilots retirement in a year where the funds return....

...is greater than the hurdle rate?

...is equal to the hurdle rate?

...is less than the hurdle rate?

The whole idea of having a “hurdle rate” is to benefit the pilot if the fund earns a greater return....and to protect the company if the fund earns less (...the pilots retirement is adjusted downward)

Having a “hurdle rate” is precisely what makes a Variable Pension Plan “variable“

Take-away the “hurdle rate”, and have the company fund a benefit that’s solely based on earnings is what we have now! That’s a truly Defined Benefit Plan, where the pilot is not subject to market/fund manager performance

If the company’s Actual Return on Assets is greater than their (forecast) Expected Return on Assets (...an implicit “hurdle rate” they define for themselves) then they benefit and can contribute less than they planned

if AROA is less than EROA then they must contribute additional funds

If your understanding is somehow different please share.

In Unity,
DLax

kronan

My understanding of how the "hurdle rate" works is based on the comments by Greg Reardon in the MEC 2018 video-roughly about 20 minutes in.
And, you have to remember that the PSPP is a Variable Benefit plan with a pot of money built via yearly contributions by the company as a defined percentage of pay (a percentage never explicitly defined by our Union, IMO-out of a concern for how a subset of the crewforce would react)
The benefit accumulation was defined as 2%.
And, the initial accumulated Pension was defined as the Greater of
1. Accumulations + Market returns in excess of the hurdle rate.
2. A 2% floor, basically the year by year accumulation of Salary*2% (Up to the DC limit)
{3rd one added in later in the game to protect those QOL folks who stay FO's and\or only work 50-70% of their BLGs}

So, hurdle rate was 5%.
Year one value of our notional shares was based at $10. And that it's a Notional value is important to remember. It's not a value established by purchases the way a mutual fund is. It's notional.
So, in the video example, ROI on our Trust fund was 7.5%. Notional value of our shares increases 2.5%.
Year 2, ROI was 3%. So, notional value of our shares decreases 2%
But, that winds up with an accumulated benefit that would be below the running total of our Floor Benefit. So, you'd get the floor benefit.

Now, in this example, what actually happened to our big pot of $$. In year one, it grew 7.5%. Getting into year 2, we'd have a nominal 200'sh people begin collecting from it but there'd be a company contribution to it as well as the ROI of 3%.
Rinse and repeat.

kronan

When I ran the modeler, I assumed nada on market returns. All I looked at was the Floor.


And, a 2% floor based solely on earnings is Not what we have. We have a high 5, which is greatly superior to a year by year earnings accumulation.

And, Company doesn't get to Define the hurdle rate & the Company doesn't get to play Games with the ROI on Pension trusts. Reporting on the Pension Trust is strictly regulated (See FB's website for the source documentation)

And, under the PSPP, Company Contribution was going to be a defined percentage of FedEx Pilots payroll. Each and every year.
Current Pension Contributions are only required when they're needed. And one of the things that brought down United's Pension was overly rosy expected returns forecast in their Pension Trust (something that was also address legislatively)
Basicly, UAL said we don't need to add funds to our Pension Plans because we expect to return 10% over time, and then they were hit with the double whammy of a market decline and a revenue decline and then it was off into bankruptcy.

Something I don't expect to happen to FedEx. Over the past 20 years, IMO, Fedex has had realistic expectations for the returns on our Pension Trust and has used leverage, wisely, to occasionally add $$ into it even though they hadn't been required to.
And recent history has had our Pension Trust ROI exceeding it's expectations by a percentage or so.
An extra percent might not seem to be that big a deal, but it adds up over time.

DLax85

Thanks for your detailed response. But, I'm still uncertain I understand. How does the "hurdle rate: allow the Trust to continue to gain in value without passing that value on to us? How is it a stabilizing source in down years?

Your example states our pancakes "grow" when ROI > Hurdle Rate. But, isn't that "passing the value on to us"?

If we negotiate (agree) to a Hurdle Rate that ends up being too high, and ROI < Hurdle Rate, how will the guaranteed 2% floor be maintained?

Won't the company have to add additional funds, above the agreed upon percentage of earnings?

Isn't this precisely what the company wants to avoid?

I fully understand why pilots voiced concerned about having a Variable Benefit Plan, so the Union added the word Stablized - I'm still don't understand the mechanism for this stabilization/floor. If the hurdle is set too high, and ROI doesn't perform, the money has to come from somewhere. The company?? Isn't this what we already have with our current A Plan?

(Note: Yes, I admit current A Fund has earnings cap and YOS cap, and the VBP or PSPP seeks to remove those)

I guess, I just don't see the company agreeing to this "floor", especially if we are asking to raise the earnings cap & allow no CAP on YOS.

Of course, the company will clearly see the benefit of us giving up the "High 5" FAE calculation....and enticing guys to upgrade at 100% and max fly every year,. Like PBS, they want to have guys work harder & harder, so they can minimize the size of the crew force.

In Unity,
DLax

kronan

Okay, I'll take a crack at this.

If you give me $100, I promise to invest it and give you any gains over 5%. I get to keep all the gains that are 5% or lower.

Wooohooo, earned 10% this year. So, here you go, $5. What do you mean, you want the whole $110 bucks? That wasn't our deal, our deal is you get all of the gains over 5%.

Let's try this again,
Year 2. Man I sucked this year, only earned 4%. So, you get $0 and I get $4

IF our agreement was excess over 2%, year 1 you'd get $8 and I'd get $2.
Year 2 we'd split it.

Wicked simplistic, but hopefully understandable.
Much more complex when you convert the values of earnings into notional shares, and then base the increase\decrease of the notional shares on the ROI of the investments.
Much easier to understand a Mutual fund (or our B fund) where the percentage is actual cash converted into actual shares with prices based on the value of the owned assets. Rather than an earned benefit. Saying I've earned a benefit worth 2% of my salary is greatly different than saying there's been a 2% deposit into my 401k

Nightflyer

I can see it now:

ALPA: That's not what it means.

Company: Grieve it.

Arbitrators: ALPA loses.

No voters to ALPA leadership: We told you to plus up the A plan and give us a bigger B fund with cash over cap and you did it your way and you failed us, AGAIN!!!!

When will the block reps listen to the people they supposedly represent? If this thing is so complicated that ALPA can't explain it to the crew force so we understand it, how can we be sure the lawyers won't get played (AGAIN) by the company?

KISS!!! Keep It Simple, Stupid!!!!!

USMCFDX

But the polls say the pilots want pancakes - #BULL$HIT