Market Based Cash Balance Plan Issues

Legacy Pension

First, recognize that in effect, the TA showed that the Company can improve the pension. What would happen if NO ONE took the MBCBP? Then, the Company would provide a $39,000 increase to everyone on property now via increasing the contract cap to $338,000 (for those that retire post 2027).

—– Current: High 5 is >= $260,000, then YOS X $5,200 or max of $130,000
—– Proposed: High 5>=$338,000, they YOS X $6,760 or max of $169,000

The Company has now shown via TA that not only is an improvement possible, we have a “floor” to bargain with in the future. How may the Company afford this? Page 65 of Annual Report (https://investors.fedex.com/financial-information/annual-reports/default.aspx)
There are currently no anticipated required minimum contributions to our U.S. Pension Plans based on our funded status and the fact we have a credit balance related to our cumulative excess voluntary pension contributions over those required that exceeds $3.5 billion. The credit balance is subtracted from plan assets to determine the minimum funding requirements. Therefore, we could eliminate all required contributions to our principal U.S. Pension Plans for several years if we were to choose to waive part of that credit balance in any given year. Our U.S. Pension Plans have ample funds to meet expected benefit payments.

Pension “costs” –
– PBGC Premiums https://www.pbgc.gov/prac/prem/premium-rates – $96 per participant for single employer. There’s over 190,000 participants – we translate to nearly nothing relating to annual “costs.”
– Company Contributions to Pension – just can’t beat this dead horse anymore… basically, they take in over 1.3B and payout less than a 1B – it’s almost as good as the endowments at major universities. The managers are doing well and the funds are nearly perpetual motion machines.

Company Savings
– Ever heard the “After 60, you’re working for half?” Kinda true – at least used to be. Essentially, one could be collecting $130,000 out of Pension (not the company remember) and living life. Take annual salary ($350,000) less $130,000 and you are really getting $220,000 ish. But, by delaying pension – you’ve actually SAVED the pension fund $650,000 (simple math) thereby bolstering the fund even more. Not much you say, but if 200 could retire at 60, that’s $26,000,000 per year or $130,000,000 in five. So thank you for working longer, the company thanks you for sure!
– The company “saves” by no mandatory contributions to fund.

MBCBP

Thank you ALPA – in their desire to make every airline under their umbrella the same, DAL introduced the MBCBP and we copied it (or they copied us). So we are just like them, but paid less… Watch the videos, read the Q&A, and input your info into the future modeler and this will be the best thing ever! But is it? And where are the potential problems?

Let’s start with video explaining the details of the new plan (https://fdxta.com/Sections/Section-28).

• At 1:48, we are shown the following:
  — Subject to ERISA
  — Vesting Period of 3 years
  — Insured by PBGC (also on Q&A page)
  No issue with ERISA – as a new plan, this must be approved (though 28.8.f. states that the IRS may change this plan if needed). Also, keep in mind, the accounting required is much more complicated and costs more than our defined benefit (paid by company – but still a cost that will impact the 6.5% target – more later). Also, no issue with Vesting of 3 years – that is standard among most all Cash Balance Plan. As an aside, the only difference between Market Based and regular Cash Balance Plan are the investments allowed… Market Based may use more aggressive stock/bonds (40/60 example) and Cash Balance typically use safe instruments (bonds).
  
  But, first issue with MBCBP – Insured by PBGC. This is only after five full years (https://www.pbgc.gov/about/faq/pg/general-faqs-about-pbgc). PBGC only guarantees a portion each year until 5 years of the plan has passed. This is due to previous pensions raising benefits (knowing they couldn’t pay) and filing bankruptcy (thereby maximizing PGBC payout). PBGC now requires some runway behind the program to ensure fiscal responsibility of new or increased plan. If this is true for MBCBP, is this true for our increased pension? Yes, but the difference is around $25 billion exists in the current plan and has NO danger of imploding in next five years!
• At 2:30 we have Compensation Credits: which are a percentage of pensionable earnings. The DAL plan essentially lists all $$ earned (pensionable earnings), our TA page 245 states “Compensation shall be as defined in the Pension Plan, except as follows:” then lists the 401(a)(17) limit (currently $330,000). THIS IS HUUUUGGGEEE.
  — First, the Company is FIDUCIARY (not a third party, page 248, 28.12.) – so what if they say compensation credits are based on straight time pay, no sick counted, no DSA counted, VLT, DRF, etc…? The Company’s best interest is to contribute the least amount as possible per year (i.e. limit the definition of compensation credit). (Hey we just optimized that paragraph for ya)!
  — Second, Compensation Credits are the “pancakes” of the past. Are you a quality of lifer, min BLG runner, or someone that only wants to work X hours per month and drop all else? The credits are based on YOU working a lot! Every year! GREAT for COMPANY – more productive workers!
  ——- Consider the following:
  ————- Min BLG = 884 CH.
  ————- To get max benefit of $36,300 ($330,000 X 11%) requires $373.30 PAY RATE ($330K/884)! That’s a 13 year WB Capt and no NB Capt.
  — Third, and possibly the greatest RISK is the chart below – the MBCBP is tied to the last arrowed column and clearly shows that the IRS (or congress) determines the max contribution. From 1994 to 2008, the contribution max declined and didn’t return for 14 years. You are at the mercy of congress and future governmental fiscal solutions regarding the budget (i.e. tax the rich, limit the rich, pay your fair share, rich have it too good, etc…) (This is question 20 in the Q&A page). Question 21 on the Q&A addresses this situation – “Since the MBCBP is subject to the IRC 401(a)(17) limit, are there any protections in place in case this IRS limit is lowered? (28.E.5.)”
  —- Answer – If the IRC 401(a)(17) limit is reduced, the Company and ALPA will meet and discuss plan alternatives. Until the Company and ALPA agree on any alternative, the Company will create a Non-Qualified Plan. This plan will capture Compensation Credits that would otherwise been credited to the MBCBP had the IRC 401(a)(17) limit not been reduced.
  —- So no one really knows what they will do! It is basically at Company’s discretion and who really thinks that the Company would agree to voluntarily provide more $$ outside this compensation limit?

Let’s dig a bit more into the Questions and Answers on the Section 28 website.

• ALPA – there are 14 references to ALPA and basically allow ALPA and company to decide parameters of the plan. Does it mean FDX MEC? I don’t know the answer, but ALPA has teeth everywhere (the DAL TA also has this) –
  — If the IRC 401(a)(17) limit is reduced, the Company and ALPA will meet and discuss plan alternatives. Until the Company and ALPA agree on any alternative, the Company will create a Non-Qualified Plan. 
  — The Company will consult with ALPA to develop an initial IPS.
  — 25. Does ALPA have any input over the Plan Investment Portfolio? (28.C.11.) Yes.

Lastly – the retirement age per 28.8.a. under the MBCBP is age 62. So – work harder for longer…and pray the IRS remains favorable to our high compensation!

Moving Forward

TA passes – EVERYONE could simply select the no brainer increase to $338,000… sucks to be a new hire. Company wins (again) – we get an improvement until enough new hires agree to freeze pension completely…

TA Fails – GREAT! We now have a floor to achieve the same numbers (albeit much easier to understand)
—- The FLOOR of the A Plan increase is now $338,000 or $169,000 / yr
—- The FLOOR of B Fund contributions would now be 20% and must include Cash over CAP.
—- Guess we wouldn’t need a modeler, emails, videos, links, consultants, IRS approval to tell us how this works!