Yes the company can make out when the market performs well but if they have over optimistic assumptions they could be left with a big liability. With DB they pay as they go. Companies sold DB because they saw an opportunity to save money, how many would die without collecting a penny, workers agreeing to work for less over a 40 year period in exchange for security during their final 15 or so, if they make it, and once the plan had a decent base amount it would self fund through investments.
Actually AMR was historically far better at setting realistic assumptions for the plan's return on assets, and funding accordingly, than many other airlines, which is precisely why several years back (before other legacy carriers starting filing for bankruptcy and either freezing or dumping their plans), AA's was actually pretty much the best-funded of the bunch.
well we were told different back in the 90s. especially around 1997 when the pilots were going to go on strike. We were told that we should not allow the companys huge profits to raise our expectations because much of the profits were from the pension plan performing above expectations and excess funds were added to the bottom line.
Well, respectfully, I'm not sure if the union is necessarily the most dispassionate, unbiased source for information on the company's finances - nor, for that matter, is the company, necessarily, when it comes to the messages they communicate to organized labor.
Perhaps AA was taking money out of the pension plans, but rather the massive spike in the stock market in the 1996-1999 period meant that AA's cash contribution during those years was effectively nothing, and the liability carried on its balance sheet would have decreased, which of course would have had a positive impact on the company's finances. In other words: it's obvious that when the stock market goes up, AA's defined benefit pension liability goes down, and that does of course have a positive impact on the company's finances, but I still don't know that that necessarily means AMR was actually going into the pension fund and removing assets.
Whats stopping the company from adopting a more realistic assumed ROI, say 3% and funding the plan properly so they dont end up with such a big liability when the economy turns south? I recall the company asked us to help them lobby for more flexibility on funding the plan. Didnt that contribute to making the number as big as it is now?
Again - AA actually has, traditionally, made fairly realistic assumptions about long-term returns for the pension fund's assets. The problem is that those assumptions about funding are predicated on payouts to beneficiaries far in the future, whereas the funding requirements are established by ERISA legislation based at least partially on the here and now, based on today's stock market performance and thus today's performance of fund assets.
AA's return assumptions may be somewhat optimistic, but either way the larger problem here isn't AA's assumption about the return on plan assets over the 10-, 20- or 30-year time horizons that are relevant for pension funds, but rather the atrocious performance of the stock market over the last 18-24 months, which AMR could not accurately predict nor do anything to improve. The funds' trustees simply have to try and adjust the plan's portfolio as best as possible, but in an economic situation like the U.S. (and world) is in right now, there aren't too many great places to park your money, whether you're an individual or a pension fund. And thus, when - due largely to the general horrible state of the U.S. and global economy - the fund's assets to not meet their necessary returns for the year, AA must make up that difference through cash contributions to the pension fund. That's major, major money.
In 2010, the company assumed an overall return on plan assets of 8.5%; the annualized 10-year rate of return as of 12/31/10 was 7.74%.
