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Accrued liability |
The accrued
liability is the measurement of the benefits earned by
participants at a given date.
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Cash balance formula |
Under the cash
balance formula of the Delta Retirement Plan, the benefit is
expressed as a single sum rather than a monthly payment.
When an employee retires or leaves the Company, he or she
can receive the plan benefit as a lump sum or in a monthly
payment (employee’s choice). The amount of the employee’s
benefit grows by the addition of pay credits (for example 6%
of pay per year), and pre-determined interest credits, both
of which are added to the “account” each year. Like all
defined benefit plans, however, there is no actual separate
and identifiable account for each employee. The assets in a
cash balance plan are all held by and managed by the Plan
Sponsor (the Company) and the Plan Sponsor gets the benefit
of the gain or loss on the investment of the assets, which
can offset future contributions.
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Delta Retirement Plan |
The defined benefit
pension plan for non pilots at Delta. The Delta
Retirement Plan includes two different types of benefit
formulas; the cash balance formula and the final
average earnings formula. Although the cash balance
formula is similar in some respects to a defined
contribution pension plan, it is nevertheless a
defined benefit pension plan. The final average
earnings formula was the only formula under the
Retirement Plan until the cash balance formula was
added in 2003.
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Defined benefit pension plan |
A defined
benefit plan is a retirement plan which “defines”, or pays a
benefit according to a predetermined benefit formula.
Generally, the employer bears the risk for funding the plan,
which means the company must contribute enough money to fund
the benefit, even if the investment return is negative.
However, the employer also gets the benefit of any gain on
the investment of the plan assets, which can offset future
contributions. Two common types of defined benefit plan
formulas in use at Delta are final average earnings and
cash
balance formulas. Both the Delta Retirement Plan for
non-pilots and the Delta Pilots Retirement Plan for pilots
are defined benefit plans. One feature of a defined benefit
plan is that if the employee elects an annuity form of
payment, the employee will receive the benefit for his life,
regardless of how long he lives, assuming the plan is not
terminated.
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Defined contribution pension plan |
A defined
contribution plan is a retirement plan which specifies the
amount the employer and/or employee will contribute to the
plan. The employees bear the risk related to the investment
of the assets. Delta’s Family-Care Savings Plan is a defined
contribution plan. Once the account is paid out, no further
benefits are payable from the plan.
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DRC
(Deficit reduction contribution) |
Funding
requirements for defined benefit plans are determined
annually. If the funded status of a plan falls below a
certain level, the funding requirements include payment of
the underfunded amount on an accelerated basis. This
accelerated funding amount is referred to as the deficit
reduction contribution.
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| DRC
relief |
In early 2004, Congress passed the Pension
Funding Equity Act of 2004 (PFEA). PFEA included a provision
providing airlines with an option to elect to defer (not
eliminate) a portion of any required deficit reduction
contributions for the 2004 and 2005 plan years. Delta
elected this relief for 2004.
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Final average earnings (FAE) formula |
Under the FAE
formula of the Delta Retirement Plan, a final average
earnings benefit is a benefit determined by using the
employee’s average earnings in the final years of their
career rather than their average earnings over their entire
career. In Delta’s retirement plans, the final average
earnings benefit is determined using the highest 36
consecutive months during the last 10 years of service.
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Frozen Plan or Frozen Benefit |
A
frozen plan is a plan in which no further benefits are
earned after the date the plan is frozen. A frozen benefit
is the benefit that was earned prior to the date the plan
was frozen. So, for example, if a cash balance plan is
frozen, no new pay credits will be credited to the
participant’s accounts after the date the plan is frozen. In
an FAE plan, the FAE used to determine the benefit at
retirement will be based on the participant’s earnings and
service up to the date the plan was frozen.
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Funded Status |
The funded status of a
pension plan is determined by comparing the benefit
obligation (benefits already earned by plan participants) to
the actuarial value of the plan’s assets at a given point in
time. There are many ways to measure the components used to
determine the funded status of a defined benefit pension
plan.
Companies generally measure
funded status on an on-going basis, i.e. the requirement to
pay benefits is a long term obligation, therefore funding is
looked at over the long-term as well. The Pension Benefit
Guaranty Corporation (PBGC) uses a termination funding
measurement, which measures whether or not there are
sufficient assets to pay all earned benefits immediately
based on short term interest rates.
Funding rules are very
complex and at times even preclude companies from funding
plans on a tax favored basis. In addition, rules governing
accounting (vs. funding) are governed by different
regulations and therefore there are different definitions of
funded status that apply in accounting terms.
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Pension Benefit Guaranty Corporation (PBGC) |
The PBGC was
created by the Employee Retirement Income Security Act of
1974 to, among other things, provide a level of protection
for participants of defined benefit plans. The PBGC is not
funded by general tax revenues, but from insurance premiums
it collects from employers that sponsor defined benefit
plans.
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Unfunded liability |
The unfunded
liability can be measured several different ways and for
several different purposes. However, generally, it is the
amount by which the benefit obligation (benefits already
earned by plan participants) at a given date exceeds the
actuarial value of the plans assets. Also see Funded Status
above. |
