9.03.19 – Pension De-Risking

Tuesday, September 3, 2019

LIFE ANNUITIES:

One popular “de-risking” plan is for the employer to buy an annuity from a large financial company, such as an insurance company, that will pay out for life (a life-annuity) the same amount as calculated by the pension plan. This option may sound like it has the good benefit of removing American Airlines and the risk of another airline bankruptcy from the pension payout. Unfortunately, also gives up some solid worker protections.

— The employer pension plan has the PBGC as an insurance backup in case of a bankruptcy. A life-annuity issued by a financial company does not currently have any PBGC protection for those annuities. While the PBGC has its own funding issues, having a government institution backup with possible future problems beats having no backup in place at all.

— The employer pension plan is governed under ERISA, a federal statute that has many employee/retiree protections, including appeal rights and federal government oversight, that a life-annuity from a financial company does not have. If you have a problem with your financial company life-annuity, you will probably be limited to complaints to a state insurance commission, and forced into binding arbitration.

LUMP-SUM:

Another popular “de-risking” plan is for the employer to offer a lump-sum payout in exchange for giving up the guaranteed lifetime income of a pension. This essentially transfers the risk that you will live a long time from the employer to the retiree.

The “worst case” scenario in retirement is that you run out of money before you run out of life. With a guaranteed lifetime pension payment, that will not happen. With a lump-sum that you invest, and take out monthly payments, you could easily run out of money with the next stock market crash, or from a “hot” stock that suddenly becomes worthless. Not only does the employer transfer the risk of living too long from themselves to the employee with a lump-sum, they also transfer that risk to all of us. In our culture, if a retiree runs out of money, they become a burden on the government and taxpayers through our poverty-based social support systems.

While a large lump-sum can seem super attractive, the history of lump-sum payouts shows that time and time again, average workers do not make as wise of investment decisions as the professionals employed by pension plans. If an employer pension plan “runs low on money” because you lived longer than they projected, or did not get the market returns expected, then the employer has to add extra money to the plan to make up for that miscalculation. If you are living off of your lump-sum and live too long, there is no other responsible party to make up that short fall. You are just out of money.

It also seems rather obvious that the reason an employer offers a lump-sum to an employee/retiree is that the employer thinks/knows that the lump-sum will cost them a lot less money over time. If the employer thought it would cost them the same, or even benefit the employee more, it seems unlikely they would offer that option. “Costing the employer less over time” is another way of saying “reducing the benefit” that you have earned through your union contract and hard work.

BEST DE-RISKING PLAN:

APFA believes that the best “de-risking” plan for our pensions is to have American Airlines fully fund the plans, not just meet the legal minimum contribution as required by law. Fully funding the plans would convert them from a liability on the balance sheet to a major asset on the balance sheet. That would be a win-win-win for the airline, the stockholders, and our members.