ALPA Promotes Three-Phase Pension Reform
action should help airlines maintain
By Rob Wiley, Staff Writer
Air Line Pilot, September 2003, p.32
Speaking on behalf of an ALPA-supported pension plan reform proposal, ALPA’s president, Capt. Duane Woerth, told the Department of Labor Working Group on Defined Benefit Plan Funding and Discount Rate Issues that defined-benefit plans, particularly in the airline industry, are facing an unprecedented pension-funding crisis. The crisis has already affected thousands of pilots and could affect thousands more if not resolved, he said.
The defined-benefit plans that most airlines sponsor were at or exceeded 100 percent funding in 1999 and 2000. However, by 2002, 3 years of declining stock markets and record-low interest rates caused the level of funded benefits to drop at all airlines.
"This crisis has resulted in US Airways terminating the pilots’ defined-benefit plan, raising fears that plans at other airlines are soon to follow," Capt. Woerth testified in mid-July. "The termination of the US Airways pilots’ plan resulted in pilots’ losing significant retirement benefits and in considerable liability being transferred to the Pension Benefit Guaranty Corporation."
He cited several factors in the current pension-funding crisis, emphasizing that it does not stem from employers’ failing to adequately fund their pension plans during the 1990s. In fact, the defined-benefit plans that most airlines sponsor were at or exceeded 100 percent funding in 1999 and 2000. However, by 2002, he said, 3 years of declining stock markets and record-low interest rates caused the level of funded benefits to drop at all airlines.
"The current low interest rates and abysmal market performance have combined to create this crisis," Capt. Woerth said. "Interest rates are at levels not seen since the 1960s, and stocks are only recently appearing to show signs of recovery from the longest and deepest bear market since the Great Depression in the 1930s."
On top of the faltering stock market and historically low interest rates, Capt. Woerth noted, the airline industry itself is in the midst of a period of record losses—$10 billion in 2001, $11 billion in 2002, and an estimated $8 to $13 billion in 2003.
Those losses have caused airline liquidity to dwindle, reducing available cash to fund retirement plans in 2002 and 2003.
Yet, he said, airline carriers are required to contribute additional funding to pension plans when they can least afford to pay.
Because of those factors, Capt. Woerth said, changes in pension-funding rules and requirements should be implemented to help airlines to maintain and fund their employees’ plans, protect workers’ retirement benefits, and ensure the financial viability of U.S. passenger airlines. He said that ALPA recommends a three-pronged approach to achieve those goals.
First, he said, Congress should replace the now-obsolete 30-year Treasury rate with a composite corporate bond rate based on three or more corporate bond indices. Because corporate bond rates are related to and track group annuity purchase rates, that move would add a much-needed hedge to the volatility of the pension plan contribution process.
"Extending the stopgap funding measure currently in place for another two or three years is not sufficient relief," Capt. Woerth said. "Cash-strapped airlines, some of which are in bankruptcy, are required by vendors, equipment leasors, lenders, and bankruptcy courts to project pension contributions for seven or more years for business-planning purposes. In making these projections, companies must assume that the stopgap relief will expire without any permanent interest rate fix.
"This causes the projected contributions to be very large for an extended period of time," he continued. "In the case of US Airways, the bankruptcy judge said it would be folly for the company to assume that Congress would pass any relief until it actually does so."
Capt. Woerth noted that the Bush Administration has proposed using a corporate bond yield curve to determine the rate corridor, based on the duration of plan liabilities. ALPA’s President told the Working Group that adopting such a benchmark would add more complexity to the already complex funding rules. He said that actuarial funding for defined-benefit plans is, by its nature, an inaccurate science, given all of the assumptions that must be used. Therefore, trying to make this one interest rate assumption "more accurate" does little to improve the results.
"If a permanent replacement for the 30-year Treasury bond rate is also applied to the calculation of lump- sum payments, we recommend a long transition period, similar to that proposed in H.R.1776, the pension legislation introduced by Rep. Rob Portman (R-Ohio)," Capt. Woerth said. "For pilots who must retire at age 60, this is particularly important. It would be unfair to pull the rug out from under employees who have carefully planned their retirement finances, especially pilots who can’t fly longer to make up for amounts lost because of a change in the basis used to calculate lump-sum payments."
"It is critical that airlines be able to continue to maintain and fund
defined-benefit retirement plans for their employees. Adopting ALPA’s
recommendations would achieve this goal."
As the second part of ALPA’s three-pronged approach to pension funding reform, Capt. Woerth said, the Association recommends approval of a special, temporary funding rule for certain defined-benefit plans that passenger airlines maintain.
Over the last few months, he said, ALPA has worked with a coalition of airlines and all of the major AFL-CIO airline unions to develop such a temporary funding rule. On July 14, Rep. Dave Camp (R-Mich.) and a bipartisan group of lawmakers introduced the Air Line Pension Act of 2003 (H.R.2719), which includes this special funding rule.
"This rule would allow a five-year moratorium on the deficit-reduction contribution, with the ability thereafter to amortize the unfunded liability over a 20-year period," Capt. Woerth said. "This relief would be available to any passenger airline plan that had a funded percentage of less than 80 percent as of Jan. 1, 2003."
Payments would be interest-only payments for the first 5 years and level principal and interest payments for the last 15 years. While the 5-year moratorium would relieve current extraordinary funding pressures, airlines would still be required to make the minimum funding contribution required under ERISA’s regular funding rules.
"The Air Line Pension Act of 2003 is a unified approach by the passenger airlines and their unions to solve an airline industry problem," Capt. Woerth testified. "It requires no financial commitment from the government, helps preserve the economic viability of the airline industry, and provides for a more secure and stable retirement for airline employees across the industry."
Other provisions of H.R.2719 include the following:
• a provision to restore the US Airways pilots’ pension plan;
• a requirement that the unamortized portion of a pension contribution that has been waived by the Internal Revenue Service be treated as a plan asset for purposes of calculating the deficit-reduction contribution (this would result in a more appropriate deficit-reduction contribution); and
• a provision limiting the PBGC liability by treating an airline plan as if it had been frozen as of the date of enactment of the legislation for purposes of the PBGC guarantee.
Finally, Capt. Woerth said, ALPA recommends allowing employers to make larger contributions to plans when they can afford to do so. That should further strengthen funding rules for defined-benefit plans, he said.
"One way to achieve this result is to allow employers to take into account expected cost-of-living increases in the limitations under Code Sections 415 and 401(a)(17) when calculating the plan’s funding obligation," Capt. Woerth said. "Additionally, employers should be permitted to make deductible contributions to a plan until the plan’s assets equal the greater of the present value of all future benefits or 130 percent of the current liability."
Capt. Woerth noted the ongoing debate over the merits of traditional defined-benefit plans as the best retirement vehicles for U.S. workers. He told the Working Group that airline employees are unique in a country where many workers frequently change jobs and even careers. Airline employees, especially pilots, tend to work for the same employer their entire careers, making traditional defined-benefit plans the best mechanism for providing a major portion of their retirement benefits. While other workers need portability, most airline employees need a pension promise they can count on from their one and only employer, he said.
"Some government officials have used the example of the steel industry as the basis for their assessment that Congress should not provide pension-funding relief to the airline industry," Capt. Woerth said. "They argue that, when pension relief was provided to the steel industry, the government was still left with significant pension liabilities when the steel plans eventually terminated.
"However, the airline and steel industries differ starkly. The airline industry is a cyclical, not a declining, industry. The steel industry suffered a long-term decline over the last 25 years, with thousands of jobs lost to lower-cost producers overseas and pension plans underfunded for decades. The airline industry has not been in a protracted decline. Just three years ago, the industry was profitable and pension plans were well funded.
"It is critical that airlines be able to continue to maintain and fund defined-benefit retirement plans for their employees," he continued. "Adopting ALPA’s recommendations would achieve this goal. These proposed changes would also protect the retirement benefits of pilots, protect the solvency of the PBGC, and further bolster the financial viability of the U.S. passenger airline industry."