Brothers and Sisters,
In these trying times I hope everyone is staying safe and remaining healthy. While we work through the stresses the pandemic is causing for our families and on the job, I wanted to take the time to write to address an issue that has arisen regarding the status of the Continental Airlines Retirement Plan (CARP). You may have been alerted to the recent distribution of several documents related to the funding and status of CARP contained in the Annual Funding Notice (AFN). United is required by law to issue this document and related materials each year to provide insight into the performance of your defined benefit retirement plan. The document itself contains a number of measures of the solvency and performance of CARP, but they can be more confusing than helpful due to the actuarial language and complexity of assumptions, accounting rules, and calculations. I thought it best to have the funding notice reviewed and analyzed by our Actuary and Economist trying to explain how best to understand the funding notice and how to evaluate the best option available to you during this time.
I know many of you have concerns about the plans solvency and the company’s recent financial instability. I think the information below will ease your mind and give you much needed information in order to make a pragmatic decision that’s best for you and your family.
Below is a brief summary of how the funding levels of the plan stand, along with an explanation of how to understand the Annual Funding Notice.
Summary of Annual Funding Notice regarding the status of the Continental Airlines Retirement Plan (CARP)
We understand you may be concerned that the latest information from United Airlines about the Continental Airlines Retirement Plan, the Annual Funding Notice (AFN), can be misinterpreted.
We also believe that CARP is an important retirement benefit and we worked hard to expand coverage of the CARP to all United Mechanics with the last contract. CARP is particularly appealing to its participants because it provides an option to take the benefit as a lump sum on retirement – and there is a suggestion that this lump sum option will go away over time as CARP funding levels deteriorate. While this may be an issue in the long term, especially with the economic headwinds for travel imposed due the Covid-19 pandemic, in the near term you should not be concerned of losing the ability to take a lump sum
Viability of Lump Sum Option Payout
The AFN contains a series of figures concerning the status of funding and viability of the plan. The AFN indicates that based solely on the current funding levels of CARP, the lump sum payout option will be secure in 2020 and 2021, and in fact be greater than the payouts available in 2019. The payouts will be greater because “adjusted interest rates” assumed in the plan going forward will increase funding levels above 89%. However, beyond 2021 the lump sum option is not only dependent on the health of the CARP plan but also the viability of United Airlines. The bigger risk to the health of CARP and the lump sum payout option is not the plan itself but the continued health of United Airlines during this tumultuous time and its ability to fund the ongoing benefit accruals. For now, United appears to have secured liquidity to ensure continuing operations through at least 2020 and thanks to some foresight recently made more than the Federally mandated minimum contributions giving themselves some flexibility.
For additional details regarding the status of CARP as provided in the United Annual Funding Notice, please read the information provided below, which is a more technical review of the AFN and CARP funding.
The CARP Annual Financial Notice Explained
What is the AFN and why are we receiving it? The AFN is a requirement of ERISA and is to be sent to all participants annually. It is written using a template designed by the Department of Labor.
What information does the AFN contain? It contains information about the funding levels of CARP at three successive plan anniversaries, December 28, 2016, 2017 and 2018 and it provides information on two sets of valuation assumptions. The most recent of these shows the fund was 137.1% funded on December 28, 2018 using the adjusted interest rates and 100.9% funded using unadjusted interest rates. The comparable figures for December 28, 2019 will not available until the actuarial valuation is completed.
The AFN also contains information in a paragraph entitled Year-End Assets and Liabilities. This shows assets and liabilities measured at market values and, according to the DOL, provides a clearer picture of a plan’s funded status. The funding level on this measure is 89%. The comparable figures for the prior two years were 87% (2018) and 90% (2017), although had the company added the 2019 contribution of $635,000,000 as a “receivable” part of the 2018 assets the funded ratio would have exceeded 100%.
It also contains information on how the plan’s assets are invested and the PBGC guaranty program.
Confused about which funding to be concerned about? The answer depends on why you are interested in the funding measure. If the reason is a concern about the availability of the lump sum then the funding measure using the adjusted interest rates is what you should look at. The December 28, 2019 funding measure will certainly be greater than 89% because “adjusted interest rates” are used and so lump sums will be payable in 2020 and also in 2021. (The CARES Act provides relief from the benefit restriction rules by providing that a plan sponsor may elect to treat the plan’s adjusted funding target attainment percentage (AFTAP) for plan years that include calendar year 2020, as equal to the AFTAP for the last plan year ending before January 1, 2020. This relief can be used by United to keep paying full lump sums through 12/27/2021. The side letter on funding CARP means United can NOT try to restrict lump sums by failing to make this election.) This measure is also appropriate for a long term planned funding of CARP by United – the targeted log-term rate of return is below 5% a number that pension investment experts believe is achievable.
On the other hand, if you are concerned that United might be forced in chapter 11 (again) then the market based funding measure is of concern. You want benefits to be covered by an insurer who will honor the lump sum option rather than for benefits to be picked up by PBGC who will not. This measure will vary day-by-day. The volatility on the asset side is well-known through daily news coverage of investment markets. There is also volatility on the liability side – this is the cost of buying annuities to place the pension payments with an insurance company. They are extremely risk-averse, investing in fixed-income investments, avoiding the stock market and, at the end of 2019, had an investment return expectation of 3%.
What if there is a rush to retire and lump sums are paid to hundreds of participants? The funding levels of CARP will decline because lump sums are calculated using interest rates closer to the market based than the “adjusted interest rates” and on market rates the plan is less than 100% funded. However this decline will be small. If 10% of the actives retired and took lump sums the funding rate would fall by about 1%.
Must United Airlines make a contribution to the plan for 2019 or 2020? Under the ERISA funding rules United does not need to make a contribution for the plan year ending December 27, 2019. It can make a contribution as late as September 12, 2020 and count it towards the plan year ending December 27, 2019, however IBT thinks with the Covid-19 pandemic a contribution is unlikely. We will not know if there will be an ERISA minimum required contribution for the plan year ending December 27, 2020 until the valuation at December 28, 2019 is completed.
In Solidarity,
Vincent Graziano
Airline Maintenance Coordinator
Airline Division
International Brotherhood of Teamsters
Mechanics' Dispatch