News from ALPA's Committees
Investing in Pilots' Futures
|Retirement and Insurance Committee|
By Gavin Francis, Freelance Writer
Air Line Pilot, February 2004, p.25
Members of ALPA master executive council Retirement and Insurance Committees gathered in the ALPA Conference Center in Herndon, Va., in November 2003 to participate in the Association’s Biennial Retirement and Insurance Seminar. Approximately 70 pilots attended the 2-day conference in which ALPA staff members from the union’s R&I Department explained the complexities of pension plans, accounting standards, health insurance, and pending legislation that could have long-term implications for the financial future of airline pilots and their families.
"In these uncertain times, ALPA members must take an active role in understanding critical retirement and insurance issues," says First Officer Ken Rogers, chairman of ALPA’s R&I Committee. "This event brings together ALPA member volunteers and staff members, as well as industry experts, to give our pilots the information they need."
The economic conditions of the last few years, wrought by a declining stock market, excessive pension liabilities caused by historically low interest rates, and the events of Sept. 11, 2001, have brought about dire circumstances within the airline industry. As airlines grapple with economic devastation and bankruptcy proceedings, pilots have been forced to approve less-than-desirable contracts, making substantial wage and benefit concessions in an effort to prop up failing carriers.
Much of the Seminar focused on the topic of defined-benefit pension plans and the federal requirements regarding their funding. ALPA staff members outlined some of those requirements, and explained why the present economic situation has made the funding of defined-benefit plans so difficult for many airlines.
"In a defined-benefit plan, the company promises a specific retirement benefit to employees regardless of the performance of the fund’s investments," said Jack Parrack, an actuary on the staff of ALPA’s R&I Department. "The company hopes that the investments will earn revenue over and above their obligation to employees. However, when investments don’t perform as expected, the company is required to put more money into the fund to ensure its ability to pay retirement benefits."
The Employee Retirement Income Security Act (ERISA), the federal law that governs the administration of pension funds, was enacted in 1974 to protect workers’ pension plans. Under ERISA, these corporate contributions in excess of the company’s normal plan expenditures, called deficit-reduction contributions, are required whenever a plan’s funding falls below a certain level. This level is usually 80 percent, although in some cases it can be as much as 90 percent. Additionally, overfunding could place an excessive burden on companies by shifting more corporate funds to plans than are necessary to cover the company’s pension obligations. Because corporations must operate in the narrow margins between overfunding and underfunding, companies often find that gauging their pension liabilities from year to year is difficult. As a result, this precarious financial situation can threaten the ability of companies to make their required contributions in an unprofitable year, putting many pension funds at risk.
The Pension Benefit Guarantee Corporation (PBGC) was established under ERISA to monitor employers and ensure that plans are adequately funded. If a company can no longer maintain an employee pension plan, the plan may be terminated and the administration of the fund taken over by the PBGC. However, from the perspective of an airline pilot, this situation is extremely disadvantageous, as a fund administered under PBGC would in some cases yield a vastly reduced benefit.
"When the PBGC takes over a fund, benefits stop accruing immediately, and fund participants usually recover a much lower percentage of their entitled benefit," said Parrack. "For this reason, the company’s maintaining control of the fund is generally in the best interest of employees."
Under federal rules, the present value of pension fund liabilities is calculated using the current low interest rates of the 30-year Treasury bond, a financial security that the government no longer issues. The combination of these very low interest rates, which cause the companies’ pension liabilities to be high, and the weak stock market, which caused the funds’ assets to be low, has been a double whammy to these types of plans.
Because so many airlines are having financial problems, and so many airline pension plans are underfunded, some pilot groups have found themselves in the awkward position of having to offer more concessions to make sure that their pensions, and often their jobs, remain secure. ALPA contends that the current pension crisis is the result of the excessive burden placed on the airlines by the considerably large deficit-reduction contributions, combined with the dismal state of the U.S. economy. Yet, despite the best efforts of ALPA and its member pilots to reduce the burden on airlines, some airline pension funds have failed, leaving pilots and their families with a much bleaker financial future than they had planned.
US Airways is a prime example of an airline whose pilots have lost substantial retirement benefits. During the seminar, ALPA members got an in-depth look at US Airways’ troubles, learning important lessons from expert analysis of a worst-case-scenario pension plan failure.
Between 1999 and 2000, the US Airways pilots pension plan had enough assets to cover up to 97 percent of all benefits, and during some periods the plan was funded beyond 100 percent of its benefit obligations. However, the level of funding dropped drastically thereafter. The airline filed for Chapter 11 bankruptcy protection in August 2002, and by January 2003, funding levels had fallen as low as 50 percent. Because funding had dropped below the 80 percent mark, the airline was required to make additional pension contributions, which it could not afford. In an effort to help the airline restructure, US Airways pilots have made more than $4 billion in concessions. Nevertheless, their pension fund was ultimately terminated in March 2003.
As a result of these types of pension losses, ALPA is engaged in a concerted effort to get a pension relief bill passed. Senate Democratic and Republican leaders agreed to take up limited pension legislation soon after Congress reconvened in January. The joint leadership decision came after the full Senate was not able to take final action on the ALPA-supported deficit-reduction contribution (DRC) legislation before Congress adjourned in December 2003. However, ALPA supporters, led by Sen. Dick Durbin (D-Ill.), ensured that H.R.3108, a bill dealing with regulation of interest rates, would not be taken up in the new session without consideration of the DRC legislation.
Additionally, ALPA has called for separate legislation to also include a provision for restoring the US Airways pilots’ pension plan after the PBGC denied its request to restore the plan, saying that it did not have the authority and that Congress would have to approve such action. PBGC Executive Director Steve Kandarian spoke to Seminar attendees, saying that he was leery of restoring plans that had been terminated.
"Giving a special break to weak companies with the worst-funded plans is a dangerous gamble. The risk is that these plans will terminate down the road, even more underfunded than they are today," said Kandarian. However, when asked if he was totally opposed to relief efforts that might prevent additional terminations, he said he was willing to consider short-term relief under certain circumstances.
Cash balance plans
A recent trend among employee benefit packages is the cash balance plan, which has been implemented for many nonpilot employees of some of the larger air carriers, including Delta, FedEx, and Northwest. Much of the perceived appeal of this kind of plan is that it incorporates portability with a defined benefit.
Employees are provided an interest credit at a defined rate on funds contributed to their account by the company, and can generally take the value of the account with them if they leave the company. Richard Pavel, an ALPA R&I Department field representative, explained to Seminar participants that, while none of the ALPA pilot groups have this type of plan in place, the organization was assessing its value to ALPA members.
"One of our concerns," said Pavel, "is that this type of plan was designed to benefit employees who frequently change jobs, and that’s not really the group that ALPA represents. Airline pilots don’t tend to change jobs very often, so it really doesn’t offer them as much as it offers other employee groups."
Past performance is no guarantee of future returns. But when you’re investing for retirement, it’s good to have something on which to base your investment decisions. ALPA staff gave folks attending the conference an overview of several different methods that investment firms use to predict the future performance of investments.
First, Seminar participants looked at six different studies that examined the historical performance of common stocks over a variety of time periods. These studies showed that stocks averaged gains of anywhere from 8.3 to 11 percent per year.
Then ALPA staff explained two of the primary predictive methods: the dividend-discount model and the sum-of-premiums method. The dividend-discount model is a concept based on the idea that the value of common stocks is the present value of all future dividends. In plain English, this means that if you know the present value of a stock and the present value of the dividend it pays, you can make an educated guess about what the stock’s value and its dividend will be at some future date. The sum-of-premiums method analyzes three components: inflation, risk, and return for use of funds. According to this method, investors will determine by market consensus the returns that stocks will give you using these three factors.
"It’s a complicated area of investment that is difficult for many people to understand, especially because there is so much uncertainty," said Bob Lipsey, an ALPA pension investment coordinator. "Our mission is to help our members as much as possible by educating them about the various techniques professionals use."
The session ended with a look at what a few of the professional investment firms were predicting for future investment returns. According to those projections, stocks will gain anywhere from 6 percent to 11 percent annually, and government bonds will return between 3.66 percent and 4.5 percent annually over the next 10 years.
"It’s an imperfect science," said Lipsey. "But being aware of the methods is important."
Health care premiums have risen consistently over the last several years, increasing by 10.9 percent in 2001, 12.9 percent in 2002, and 13.9 percent in 2003. According to a 2003 survey, the average annual cost of providing coverage for a single employee is $3,383, and the cost for a family is $9,068. Health care cost increases are expected to continue, and as a result, companies may seek to lower their costs by a combination of reducing benefits and passing some of the cost increase on to employees.
"Consequently, health care benefits will probably be a major issue in contract negotiations for the foreseeable future," said Dave Vance, director of ALPA’s R&I Department.
ALPA’s R&I staff summarized recent developments in the health care industry for Seminar attendees to explain some of the circumstances that are driving those cost increases and to predict what negotiators are likely to encounter at the bargaining table.
"Depending on the terms of your collective bargaining agreement, you could end up paying increased co-pays for doctor visits and prescription drugs, or increased deductibles for health insurance," said Pavel. "Ultimately, companies will probably try to pass on to employees substantial costs."
Seminar leaders also explained the implications of the Health Insurance Portability and Accountability Act (HIPAA), which was enacted in 1996. Under HIPAA, the Department of Health and Human Services issued patient privacy protections in an effort to encourage the electronic interchange of health care information. As a result of this legislation, a number of important safeguards were implemented to preserve the security and confidentiality of personal medical records. Most health care industry groups were required to comply with these federal standards by April 2003.
Pilots who serve on company review boards that evaluate disability claims may encounter HIPAA regulations. These boards often have reason to examine employee medical records, and employers may ask them to sign confidentiality agreements to protect the company against lawsuits.
Additionally, participants learned about a host of existing ALPA-provided services, such as various types of life, disability, and long-term care insurance, as well as pilot-specific loss-of-license plans, designed to compensate pilots whose flying status has changed due to loss of a medical certificate. To review ALPA’s member benefit programs on line, members may go to "Insurance Programs" under "Member Services" on their personal homepage at www.alpa.org or send an e-mail message to insurance@ alpa.org. To obtain program materials, including applications, members may call 1-888-FLY-ALPA and press 3. If more information is needed, pilots may contact a Member Services representative at 1-800-746-ALPA. ALPA members are also eligible for financial investment assistance and retirement planning through a program with Harris Bank.
Seminar participants often take what they’ve learned back to their local pilot groups and conduct their own workshops to educate other line pilots about their employment benefits. While these workshops attract a diverse group of pilots, many of those who attend are quickly approaching mandatory retirement at age 60. The knowledge they gain is of immediate importance to them as they assess their own financial situation going into retirement.
But F/O Rogers stresses the importance of addressing retirement issues early. "We’d like to have more younger pilots working on R&I Committees," he says. "We want them to realize that the factors affecting their retirement plans today can have a tremendous effect on their financial lives 20 or 30 years down the road."
Perhaps the most important benefit of the Seminar is ALPA’s ability to send more knowledgeable pilots into contract negotiations. R&I Committee members come away from this Seminar much better equipped to support their MECs and negotiating committees.
"Pilots tend to be a pretty savvy group of people when it comes to retirement and health care issues," said Vance. "That type of knowledge serves them well, especially at the bargaining table."