The Uncertain Future of Defined Benefit
Plans
Corporate
executives are attempting to use this "perfect
storm" to create
uncertainty about the viability of
defined benefit plans in the future. That puts the retirement security
of hundreds of thousands of airline employees at risk.
The current
situation calls into question some of the funding and contribution rules
presently applicable to these plans. Also, some in industry and government who
are hostile to the idea of defined benefit plans are reacting to the current
situation by calling for an end to this type of guaranteed retirement income benefit.
"This is the death knell for
many defined benefit plans,"
says Tom Healy, Senior Fellow at Harvard's
Kennedy School of Government and an advisory director at Goldman Sachs.
"CFOs are going to more
aggressively seek to reduce their exposure to this type of liability and hand
it off to employees."
We believe that
defined benefit plans can and should survive and that there are reasonable
means that Congress, federal agencies, and companies can take to insure that
they do.
First, we must
stress that almost all defined benefit plans, including the plans of United and
US Airways, do have enough assets to continue paying current obligations for
many, many years to come. The present problems are almost entirely the result
of the twin factors of historically low interest rates and the sharp decline in
the stock market over the past two years.
This is not to
say that defined benefit plans are not expensive and that many companies would
not like to be freed from this expense. Defined benefit plans are an expensive
benefit, but they are one that AFA believes is vital to the retirement security
of its members.
AFA is actively
involved with the AFL-CIO's
Pension Working Group (the "Working
Group") to coordinate
the efforts of all workers in protecting these important retirement benefits.
The Working Group is composed of representatives of many unions and plans--multi-employer plans,
Electrical Workers, Auto Workers, Teamsters, Communications Workers, and Air
Line Pilots, to name a few.
The Working
Group is formulating a plan to preserve defined benefit plans and to help
companies weather the present funding and contribution storm. Together, we are
working to forestall any precipitous changes in pension law or regulations that
would significantly affect the continued existence of defined benefit
plans.
The Working
Group is exploring ideas like establishing a moratorium on certain
contributions, such as the Deficit Reduction Contribution, that ERISA requires
under certain pension funding formulas. A moratorium would allow companies some
breathing room and allow Congress and federal agencies time to formulate
considered and reasonable rules for the future.
It could be that
the mere passage of time, if during that time there is recovery in the stock
market and an increase in the interest rate used to calculate pension
liabilities, would correct most of the pension woes we are seeing now.
One analyst
reports that a 50 basis point (one half of one percent) decrease in the
discount rate used by airlines would increase the airline sector's total pension obligations
by approximately $2.1 billion.
The converse
also is true. An increase in the interest rate used to calculate present
pension liability would reduce these obligations just as dramatically.
Other recommendations
under consideration are quite technical, but all are designed to preserve and
strengthen the important retirement security benefit of defined benefit plans
now and for the future.
Another assault
on defined benefit plans as we have known them is the conversion of traditional
defined benefit plans to so-called "cash
balance" plans. Delta
Air Lines recently converted its pension plan for non-union employees to a cash
balance plan.
Page 5 Cash Balance Plans and The Older Worker ð
Ibid.
Fitch
Ratings, Rapid Descent: Pensions in the
U.S. Airline Industry, www.fitchratings.com , p. 4. The discount rate is the
rate used to discount future pension obligations to determine pension benefit
obligations ("PBO"). ( PBOs are used in the
funding and contribution formulas required by ERISA.) As a result, the discount
rate plays a significant role in both the funded status and pension expense (an
increase in the obligation results in higher interest expense). From 1999 to
2001, the average discount rate used by the airlines dropped from 8.11% to
7.5%. Fitch estimates that approximately $3 billion of the $10 billion increase
in airline sector pension benefit obligations was due to decreases in the discount
rate. |
