Chapter 11 threat to Pensions
09-15-2005, 05:19 PM
#1
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Joined APC: Feb 2005
Position: 737 CFI
Posts: 390
09-21-2005, 09:10 AM
#2
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Delta Pension Plans
The following is a letter from the pilot union chief John Malone. Nearly all of our clients are pilots. The vast majority of those fly for Delta. They have had many difficult choices to make in the past couple of months. It has been our firm’s job to asses each individual situation and find the best exit strategy for our clients, if that is what is needed.
For the past 6 months we have found an increasing urgency on the question, should I retire now and take my lump sum, or wait and try to stick it out with Delta, in hopes of a turnaround. For our clients that are in their lower 50’s, the choice was easy, retire now, take what you can get and make sure you do it before the August deadline.
Now things become complicated. For you Delta pilots that are reading this, it looks as though there is still a small chance that the October retirees have a chance to receive a lump sum payment. I have attached this letter as it does the best job of anything I have found so far at describing the situation in “if, then” format.
Obviously, no one knows exactly what is going to happen but at least this letter gives you four distinct scenarios to plan for.
Hope it helps,
Adam
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
For the past 6 months we have found an increasing urgency on the question, should I retire now and take my lump sum, or wait and try to stick it out with Delta, in hopes of a turnaround. For our clients that are in their lower 50’s, the choice was easy, retire now, take what you can get and make sure you do it before the August deadline.
Now things become complicated. For you Delta pilots that are reading this, it looks as though there is still a small chance that the October retirees have a chance to receive a lump sum payment. I have attached this letter as it does the best job of anything I have found so far at describing the situation in “if, then” format.
Obviously, no one knows exactly what is going to happen but at least this letter gives you four distinct scenarios to plan for.
Hope it helps,
Adam
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
09-30-2005, 06:42 AM
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September 1st Delta Pensions
Note to Delta pilots:
Our September 1st retiring Delta pilots received there lump sum pensions this morning. It was only a 30-day turn around period. For any of you Delta pilots that are reading this and decided to pull the plug before the September 1st deadline, congratulations.
I'm glad these gentleman got what they deserve and have worked so hard for.
Adam
Our September 1st retiring Delta pilots received there lump sum pensions this morning. It was only a 30-day turn around period. For any of you Delta pilots that are reading this and decided to pull the plug before the September 1st deadline, congratulations.
I'm glad these gentleman got what they deserve and have worked so hard for.
Adam
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