Disagree. If the pension is gone, they can invest that money back into the business and make a killing. You’re forgetting the opportunity cost to the company having the pension contrasted with not having it.

 

The pension wouldn't be gone, it would be frozen. So, what money are you talking about? If they haven't been required to make a contribution in over 5 years even though they hired hundreds of pilots in that same time frame, why would they be required to make a contribution in the future?

 

Haven't those who have been arguing for a straight DC plan been saying that pay raises and ever increasing IRS limits are default inflation adjustments? You totally neglected how pensions really work and are stuck on the 4% rule. That isn't how pensions work or are funded. If you look at how much it would cost to purchase an annuity today for someone turning 65 next month with a guaranteed yearly payout of $213,000 for life, that cost would be around $3.3 million or less. That is a far cry from your required $5.3 million. Our current contract even mentions purchasing annuities with the unions consent.

 

Who says they wouldn't be agreeable to that? That was never part of our ask. The ask has always been an increase to the DB plan. What you are suggesting would add great value to those with 10 years or less and very little value for those who have 5 or less years remaining.

 

Let’s state the argument so we’re not going in circles.

I believe the cost of operating the pension is more expensive than the cost of operating a DC plan. To make it more clear. I believe the cost of operating the pension is more than the 11% DC capped that was offered in the last TA.

Is it fair to say that you are arguing the opposite?

 

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.

 

So what’s the tax rate on a lump sum buyout of the pension?

 

I'm not arguing, I was asking what money you are talking about. I understand what you believe, I would like you to provide the facts and numbers that you are using to prove your belief.

 

Just so you understand what is being discussed at Fedex regarding the pension, in the failed TA, there were several options. Someone already on property could elect to stay in the pension and receive the increased benefit, or you could opt for a lower benefit and transition to a MBCBP freezing your years of vesting for the pension, or you could opt out of the current pension entirely and get a credit for the pension applied to the MBCBP. All new hires would only get the new MBCBP. So we are not talking about a total termination of the pension.

 

You’re mixing up “company contributions” with the economic cost of a pension. A pension doesn’t become cheap just because discount rates are temporarily high and FedEx hasn’t had to write a check. That only means the plan is currently overfunded, not that it is cost-free.

Here are the numbers on a rounded basis:

1. Pilot pension service cost (new benefits earned each year):

≈ $85 million per year (about 10% of the total annual pension cost of $768 million from the 10-K)


2. 11% DC cost from the last TA (capped):

Pilot payroll ≈ $1.76B (estimate from future TA)

11% DC = $193.6 million per year


Yes — the DC costs more today. But that’s not the real comparison.

The real cost of the pension isn’t “what FedEx contributed this year.” The real cost is the future liabilities created.


3. Each year of pilot accrual creates:

175–200 new retirees

$120k/year average pension

19 years of payments = $400–450 million of new long-term liabilities created every year.


4. Over 20 years that is: ≈ $8–9 billion in new obligations.


Freezing the pension stops that liability growth. That is the economic savings.