Pension~Historical Expected Return on Assets
11-17-2017, 07:42 AM
#1
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Pension~Historical Expected Return on Assets
We are all familiar with the fact the current A fund has not been raised since 1999
We’ve been told it’s too expensive to raise it, and increased PBGC costs are one of the main reasons
However, if we look at the past & current FedEx Pension Fund “Expected Reurn on Assets”, we see that the FedEx accountants & actuaries have been forced to use lower, and lower forecast rates of return to realistically and legally calculate their contributions
At times, these values are published in FedEx investor articles and are also published in public accounting documents
A few simple Google searches reveal these #s:
FY 2002 - 10.9%
FY 2003 - 10.1%
FY 2004 - 9.1%
FY 2009 - 8.5%
FY 2015 - 7.75%
FY 2016 - 6.5%
The lower these “Expected Return on Assets” go, the more expensive our A fund becomes - but from our prospective the MORE VALUABLE!
What does this downward trend tells about how FedEx accountants and actuaries view future market returns?
(Realize pension funds are typically much more “bond heavy” then a typical long term, retirement savings portfolio. Pension fund managers must generate income which matches monthly payouts to retirees)
What “Expected Return on Assets” will the new Variable Benefit Plan assume to calculate Fedexs required (BUT NOW FIXED) annual contributions?
Will FedEx be allowed (or required) to adjust this over the life of the plan?
What will be the plan “hurdle rate”?
What will be the “consultants” Expected Rates of Return on Assets” when they provide us with the software to calculate our individual payout forecasts under the new plan?
Will that differ from FedEx assumption? If so, how & why?
The accountants put a lot of very important information in the “notes /appendix sections”
Let’s read them
We’ve been told it’s too expensive to raise it, and increased PBGC costs are one of the main reasons
However, if we look at the past & current FedEx Pension Fund “Expected Reurn on Assets”, we see that the FedEx accountants & actuaries have been forced to use lower, and lower forecast rates of return to realistically and legally calculate their contributions
At times, these values are published in FedEx investor articles and are also published in public accounting documents
A few simple Google searches reveal these #s:
FY 2002 - 10.9%
FY 2003 - 10.1%
FY 2004 - 9.1%
FY 2009 - 8.5%
FY 2015 - 7.75%
FY 2016 - 6.5%
The lower these “Expected Return on Assets” go, the more expensive our A fund becomes - but from our prospective the MORE VALUABLE!
What does this downward trend tells about how FedEx accountants and actuaries view future market returns?
(Realize pension funds are typically much more “bond heavy” then a typical long term, retirement savings portfolio. Pension fund managers must generate income which matches monthly payouts to retirees)
What “Expected Return on Assets” will the new Variable Benefit Plan assume to calculate Fedexs required (BUT NOW FIXED) annual contributions?
Will FedEx be allowed (or required) to adjust this over the life of the plan?
What will be the plan “hurdle rate”?
What will be the “consultants” Expected Rates of Return on Assets” when they provide us with the software to calculate our individual payout forecasts under the new plan?
Will that differ from FedEx assumption? If so, how & why?
The accountants put a lot of very important information in the “notes /appendix sections”
Let’s read them
11-19-2017, 12:40 PM
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Forbes article from 3 weeks ago...
https://www.forbes.com/sites/baldwin.../#3e42c41d7c75
Hmmmm....
What Return on Assets will FedEx assume when they make their FIXED contribution each year?
What’s the VB plan hurdle rate?
https://www.forbes.com/sites/baldwin.../#3e42c41d7c75
Hmmmm....
What Return on Assets will FedEx assume when they make their FIXED contribution each year?
What’s the VB plan hurdle rate?
11-19-2017, 12:44 PM
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11-19-2017, 12:46 PM
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11-19-2017, 05:49 PM
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Ding ding ding. The biggest consideration for any plan change is “who owns the interest rate risk?”
Due to “emergency” federal reserve zero interest rate policy (now in the 9th year), a risk free 30 year bond pays a coupon somewhere around 2.79%. States, governments, companies, etc have ALL lowered future rate of returns based on a lower “risk free rate.” The historical 10yr rate (without FED intervention) since 1879 resides near 5.0% but has been in the 2% range due to the FED ZIRP. FedEx is paying a bond rate of 4.5% to bond holders.
So your assumption above is 100% accurate, as rates remain low, the “value” of 10,833.33 / mo increases. Simply consider the following for an investment vehicle that pays $130,000 / yr indefinitely (never using principle or a declining balance):
- $130,000 / 3% (.03) = $4,333,333.33
- $130,000 / 6% (.06) = $2,166,666,67
Those retirees in 2008 (post ZIRP) saw a significant increase in their retirement “value” because the company has assumed the risk to produce the same return. Think of the cost of an annuity with a 2% growth, 30 year, producing $10,833 = $2.94 million VS 6% growth = $1.8 million. In 1 year, the same monthly income inflated the “value” of the monthly income by 1.1 million. (Note - this is for a duration vehicle vs infinite year vehicle in above paragraph).
Yes, the 1999 retirees have felt their purchasing power reduce from 130,000 to 88,699 or 41,300 ish decline. So, something needs to change in that respect. For 2017 retirees, if they retired with 189,000 / yr that would match the 1999 purchasing power... But, what is “I guarantee you $10,833 / mo - forever” worth?
So, from the perspective of this probationary new hire, with 17 total years to be with the greatest airline - let the company assume the risk for the A plan. If cost of living adjustment is off the table - fine, simply increase B to 12% (with annual increases), cash over cap, and profit sharing for any amount over “X.” Just isn’t difficult.
Otherwise, ANY change to the A plan that places the interest rate risk on the individual will mandate “someone” managing that risk - for a fee in monetary terms or time for an individual.
Due to “emergency” federal reserve zero interest rate policy (now in the 9th year), a risk free 30 year bond pays a coupon somewhere around 2.79%. States, governments, companies, etc have ALL lowered future rate of returns based on a lower “risk free rate.” The historical 10yr rate (without FED intervention) since 1879 resides near 5.0% but has been in the 2% range due to the FED ZIRP. FedEx is paying a bond rate of 4.5% to bond holders.
So your assumption above is 100% accurate, as rates remain low, the “value” of 10,833.33 / mo increases. Simply consider the following for an investment vehicle that pays $130,000 / yr indefinitely (never using principle or a declining balance):
- $130,000 / 3% (.03) = $4,333,333.33
- $130,000 / 6% (.06) = $2,166,666,67
Those retirees in 2008 (post ZIRP) saw a significant increase in their retirement “value” because the company has assumed the risk to produce the same return. Think of the cost of an annuity with a 2% growth, 30 year, producing $10,833 = $2.94 million VS 6% growth = $1.8 million. In 1 year, the same monthly income inflated the “value” of the monthly income by 1.1 million. (Note - this is for a duration vehicle vs infinite year vehicle in above paragraph).
Yes, the 1999 retirees have felt their purchasing power reduce from 130,000 to 88,699 or 41,300 ish decline. So, something needs to change in that respect. For 2017 retirees, if they retired with 189,000 / yr that would match the 1999 purchasing power... But, what is “I guarantee you $10,833 / mo - forever” worth?
So, from the perspective of this probationary new hire, with 17 total years to be with the greatest airline - let the company assume the risk for the A plan. If cost of living adjustment is off the table - fine, simply increase B to 12% (with annual increases), cash over cap, and profit sharing for any amount over “X.” Just isn’t difficult.
Otherwise, ANY change to the A plan that places the interest rate risk on the individual will mandate “someone” managing that risk - for a fee in monetary terms or time for an individual.
11-20-2017, 04:18 AM
#7
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The plan doesn’t guarantee $130k a year for ever, it only guarantees it for the life of the pilot in question. The value of a 130k for year for a 65 year old man is about $2 million. That is about what it would cost to purchase it.
11-20-2017, 03:05 PM
#8
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Originally Posted by Fdxlag2
The plan doesn’t guarantee $130k a year for ever, it only guarantees it for the life of the pilot in question. The value of a 130k for year for a 65 year old man is about $2 million. That is about what it would cost to purchase it.
However, that’s not his main point
In an era of low bond yields the value of this lifetime annuity is very high
This fact, along with the $260 Cap not being raised, must be recognized and addressed
11-20-2017, 03:05 PM
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Projections From Vanguard - Apr 2017
Infographic: A breakdown of our 2017 economic and market outlook
https://institutional.vanguard.com/V...EMOinfographic
Historical Reurns 1926-2016
Fixed Income - 5.4%
Equities - 10.0%
Vanguard projections used in their Capital Markets Model which drive their retirement planning software
Fixed Income 1.5 - 2.5%
Equities 5.0 - 8.0%
A 60% Equities / 40% Fixed Income Plan would yield 3.6% - 5.8%
Their single value forecast - 5.5%
In a slightly more conservative 50% / 50% Fund allocation, driven by an institutional retirement plans responsibility to generate income to pay current retirees, the projected return range drops to 3.25 - 5.25%
This would drop the single value forecast to ~ 5.1%
Infographic: A breakdown of our 2017 economic and market outlook
https://institutional.vanguard.com/V...EMOinfographic
Historical Reurns 1926-2016
Fixed Income - 5.4%
Equities - 10.0%
Vanguard projections used in their Capital Markets Model which drive their retirement planning software
Fixed Income 1.5 - 2.5%
Equities 5.0 - 8.0%
A 60% Equities / 40% Fixed Income Plan would yield 3.6% - 5.8%
Their single value forecast - 5.5%
In a slightly more conservative 50% / 50% Fund allocation, driven by an institutional retirement plans responsibility to generate income to pay current retirees, the projected return range drops to 3.25 - 5.25%
This would drop the single value forecast to ~ 5.1%
11-24-2017, 07:13 PM
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Nice post.
A couple quick things to ponder. If the buying power of our $130 will continue to diminish over time, so will the relative expense cost to fund the A fund for FDX. If we just simply indexed our max retirement amount to the annual inflation rate, that would result in the same relative expense for FDX year over year while maintaining our relative buying power. Right now we allow them to reap the rewards of paying less 1999 dollars every month into the fund in order to fund our 2017 $130 retirement expense.
Speaking of inflation or buying power in future years which seems to be the phrase of the day. In order to keep pace with historic inflation, our new Variable Annuity Defined Benefit plan will have to gain 2-3% annually to stay cost neutral. Then in order to increase the average pilot's increase in retirement pay for every year they work the fund will need to earn around 8%. In order to build the surplus we need to balance out any lean years, we would need to exceed the baseline 10-11% we have to earn just to break even or maintain the $130. Since no one would recommend putting 100% into equities, the smart folks we hire to run the fund will get a combined bond, reinsurance, equity balance. Vanguard used the estimate of 5.1%. We need to double what Vanguard projects is a normal retirement plan rate of return. Yeah, I see that happening.
A couple quick things to ponder. If the buying power of our $130 will continue to diminish over time, so will the relative expense cost to fund the A fund for FDX. If we just simply indexed our max retirement amount to the annual inflation rate, that would result in the same relative expense for FDX year over year while maintaining our relative buying power. Right now we allow them to reap the rewards of paying less 1999 dollars every month into the fund in order to fund our 2017 $130 retirement expense.
Speaking of inflation or buying power in future years which seems to be the phrase of the day. In order to keep pace with historic inflation, our new Variable Annuity Defined Benefit plan will have to gain 2-3% annually to stay cost neutral. Then in order to increase the average pilot's increase in retirement pay for every year they work the fund will need to earn around 8%. In order to build the surplus we need to balance out any lean years, we would need to exceed the baseline 10-11% we have to earn just to break even or maintain the $130. Since no one would recommend putting 100% into equities, the smart folks we hire to run the fund will get a combined bond, reinsurance, equity balance. Vanguard used the estimate of 5.1%. We need to double what Vanguard projects is a normal retirement plan rate of return. Yeah, I see that happening.
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