golfandfly

Well, if this is actually true, this is a huge issue. Granted, I’m already a no voter, but this would be a nonstarter for many of us.

pinseeker

Like you said, if this is true, it could have huge implications on retirement. We give up our A plan with a soft freeze, but that money isn't protected under the PBGC. What would happen the pilot that has 15 years, we go to the VB plan, and 9 years from now the A plan gets terminated. All of that soft freeze money could be gone.

pinseeker

In 1999, the DOW reached $11400. In 2012, 13 years later, it was $12800. That's a 12.3% increase in 13 years. Some snapback. As a matter of fact, if the DOW had just met the 5% hurdle rate that the MEC is proposing, the DOW should be around $27500 today. Last I checked, it was still under $26000. In Jan 1999 the S&P was at about $1250. In Jan 2012, it was at $1300. That's a $50, or 4% increase in 13 years.

Reese

DOW Scenario:
Dec 1999: 11,497
Dec 2010: 11,577
Dec 2012: 13,104

Say your account was worth $250,000 in Dec 1999.
You invest $2,500/quarter into a DOW index fund.

Total Investment in Dec 2012: $382,500
Account Value: $497,250
Total Return: ~30% Simplified Annual Return: 2.3%

S&P500 Scenario:
Jan 1999: 1,279
Jan 2012: 1,312

Again, your account was worth $250,000 in Dec 1999.
You invest $833/month into an S&P 500 index fund.

Total Investment $380,000
Account Value: $465,950
Total Return: ~25% Simplified Annual Return 1.9%

The timespan from 1999-2012 wasn't great to say the least (one correction, one recession), but given it was a pretty rough 12-13 years, if you stayed invested, you fell just short of keeping up with inflation (2.5%).

Now, continue the dollar cost averaging after a recovery, and in Oct 2018...

DOW
Total Invested: $450,000
Account Value: $1.14M
Total Return: ~150% Simplified Annualized Return: 8.1%

S&P500
Total Invested: $447,420
Account Value: $1.25M
Total Return: ~179% Simplified Annualized Return: 9.4%

Annual Inflation from 1999-2018: 2.2%

If you're buying high and selling low, that's your fault. If you're not staying invested, that's your fault.

But the VBP will essentially dollar cost average throughout it's life. So simply comparing the DOW/S&P500 numbers from one year to the next and saying it's the "breakeven" point, doesn't fully grasp the big picture of compound interest and dollar cost averaging.

TonyC

I wouldn't consider one purchase each year to be dollar cost averaging. That's what the notional Variable Benefit Plan does. Calculate Annual earnings, calculate share price, determine number of new shares to be added to your Hope Chest.

And there will be no compounding of interest involved in this scheme. Your X1 "pancakes" you get in the first year will still be X1 pancakes the day you retire, and the X2 pancakes you get in the second year will still be X2 pancakes. They won't be working hard making more pancakes along the way. When it comes time to retire, the number of pancakes you'll have will be the sum of the pancakes you earned each year along the way.

The only VARIABLE will be the value of ALL of your pancakes, which you won't know until you retire. Every pancake will have the same value, regardless of when they were accumulated, and that value will be determined by how well the fund performs that last year. If it happens to be a bad year, too bad, so sad for you. If we've negotiated a floor, at least we'll have that working for us. If we've negotiated an option to leave the money in the account and wait for a rebound, good luck with that.

But, sorry, no compounding of interest. In fact, comparing the the DOW / S&P 500 numbers from one year to the next is EXACTLY pertinent to that situation, that decision.







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Reese

In comparison, the A fund lost 38% of it's value between 1999-2012, and 50% from 1999-2018.

Reese

You've got me there, not sure what the contribution timing would be, maybe once per year, maybe quarterly, but probably not monthly. In a way, still dollar cost averaging, but dividends/reinvestments are still compounding.

However, common misconception about the "pancake" belief.

You're earning shares/pancakes throughout your career. The individual share value/price goes up and down depending on the market, sometimes you earn share at a high price, sometimes at a low price. (but those shares will act like shares of an index fund).

When you retire, you can choose a "locked" payout, but you can also choose a "variable" payout. If the market is at an all time high, maybe "lock" in your pension (but you lose inflation protection in the long run). Market is down when you retire, chose the "variable" payout, and when the market recovers, so will your pension.

Reese

Think of it this way, you've accumulated "pancakes"/shares over your career. Let's say the year you retire your X number of "pancakes" are worth $1M that could pay a dividend/pension of an arbitrary 3%, so $30,000/year. Your min accrual/base value says those shares can never be worth less than $500,000, ie, $15,000/year.

You could "lock in" that pension of $30,000/year if you wanted to and regardless of the market performance from then on, you'd get $30,000/year, doesn't matter if the worth of your pancakes drop to 0(extreme scenario obviously) or climb to $2M. Essentially a DB/fixed annuity.

But if you choose the "variable" pension option, then that first year you get $30,000.

But over the next 3 years your pancakes increase in worth to $1.5M, now you're receiving a 3% dividend of $45,000/year.

Over the years 3-5, the market is flat, and your pancakes/shares' worth remain at $1.5M, pension $45k.

At year 6 Amazon declares bankruptcy, and now your shares are worth $250,000. Your annual pension is to it's lowest possible level of $15k/year. (min accrual/guaranteed benefit).

As Kronan, UA, etc have pointed out, all of this is to be negotiated.

We don't want our good years that exceed the hurdle rate to be set aside and used as a surplus to fund our bad years. We want our good years to remain our good years. And in bad years, the COMPANY needs to pony up to make us whole and "guarantee" that min accrual/benefit with additional contributions (similar to a DB plan).

That's what the yellow bar on the benefit modular is showing you, the "min accrual benefit" in retirement regardless of market performance.

You can continue to theorize what the dudes with over 25 are gonna get and whether or not the folks in the middle are getting screwed, but understanding the basics of a VB plan is fundamentally important.

https://www.soa.org/News-and-Publica...olatility.aspx

TonyC

And whose problem is that? Not mine, because The Company still owes me the ...

... wait for it ...




The same thing happens to the Variable Benefit Fund and the benefit I get is based on the poor performance of the fund in that last year.



What dividends? What reinvestments? I don't get any of that. The FUND will benefit, but it won't affect the number of shares I hold.



No, there is no misconception here. The value of shares at the end of year one determines how many pancakes you get for year one. After that, and until the day you retire, it doesn't matter what the market or the fund does, you have exactly that many pancakes from year one. On the day you retire, the final year's performance of the fund determines the value of those pancakes, along with all of the other pancakes collected from each subsequent year. What happened in between collecting the pancakes and retiring doesn't matter. They don't make more pancakes, and they aren't worth any more or less because of fantastic or dismal performance of the fund in any year in between. The worth of every pancake you've ever earned is determined by the performance of the fund the last year before you retire.

If during your 25 years of collecting pancakes the fund outperforms your wildest dreams for 24 years, and then falls off the cliff in the last year, the value of your retirement pancakes will be determined by the horrible last year -- unless we've negotiated a floor. The total value of the retirement fund at the end of that 25 years may even far exceed the total value of the retirement fund at the beginning of the 25 years, but that doesn't matter, either. It's the performance of the fund in that year that matters.

Superperformance in years 20-24 could be a setup for an ironic finish.



IF an option is negotiated, and the Variable Benefit Plan results in a payout that's untenable, you can HOPE things will get better, and live off of vienna sausage and ramen noodles in the meantime.

And to be clear, it's not "market down" or "market recovers" that matters -- it's the performance of the Pension Account that matters. Who do you trust to run that?






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TonyC

Then you don't want what the MEC is selling.






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