In terms of what October 6, 2012 means to the pension plan, under ERISA you cannot change the Plan and then retroactively change the rules. Changes to Pension Plans must conform to certain rules established under the law. To illustrate how that works, we can look to how both Qwest and CenturyLink ended their Plans for all non-represented employees.
In November 2009, Qwest amended the Pension Plan freezing those non-represented employees where they currently were in the plan. While they could freeze those employees, those employees retained what they had up to that point. Additionally, non-represented employees hired after January 1, 2009 are not eligible to participate.
CenturyLink followed suit freezing their current non-represented employees and disallowing future non-represented new-hires from participation the following year.
Again, you cannot change a Plan and then retroactively change the rules. This is one of the major protections of the Employee Retirement Income Security Act (ERISA).
Legally, while the door could be closed going forward, what is earned to date can’t be changed to take it away.
Changes to Non-represented Plans
Employers can end a pension plan through a process called plan termination. There are two ways an employer can terminate its pension plan:
The employer can end the plan in a standard termination but only after showing the Pension Benefit Guaranty Corporation (PBGC) that the plan has enough money to pay all benefits owed to participants.
If a plan is in a termination process and is not fully funded, the employer may apply for a distress termination if the employer is in financial distress. To do so, the employer must prove to a bankruptcy court or to the PBGC that the employer cannot remain in business unless the plan is terminated.
Could the Company unilaterally buy out all pensions and end any pension coverage?
If they didn’t have to bargain with us and decided to just dump their pension Plan, they could if they followed the process required under law. They would first have to show the PBGC that the plan has enough money to pay all The Pension benefits owed to participants. The Plan would then be required to either (a) purchase an annuity from an insurance company which would provide the participants with lifetime benefits when they retire; or, (b) if the Plan allows lump sum payments, to issue one lump sum payment to each of the participants that covers their entire benefit.
Before purchasing an annuity, the plan administrator must give participants advance notice that identifies the insurance company (or companies) that the employer may select to provide the annuity. The PBGCs guarantee ends when the plan either purchases annuities for or gives participants lump sum payments.
Is the Qwest Pension Plan safe?
On page 105 of Qwest’s current annual 10-K Report, it is reported that:
“The accounting unfunded status of our pension plan was $585 million at December 31, 2010. During 2012 we expect to begin making required contributions to the plan and we estimate that these 2012 contributions could be between $300 million and $350 million.”
The Qwest Plan was underfunded by $790 million as of December 31, Continuing on page 110 of this Report, the “Fair value of [pension] plan assets at end of year” 2010 was $7.66 billion. And, on page 120, Qwest reports the total pension plan “benefit obligation” at end of year 2010 was $8.245 billion. Current Plan assets are at 93% of liabilities.
By law they are required to make contributions to bring it to 100% but also gives them time in which to make those contributions.
Who is covered by the Qwest Pension Plan?
* Employees with one or more years of service
* Participation is automatic don’t have to enroll
* Occupational employees hired or rehired before 12/31/08 are vested after 5 years (traditional Pension Plan) Occupational employees hired or rehired after 12/31/08 are vested after 3 years (Cash Balance Formula)
* Eligible to take benefit at termination (if vested), do not have to wait until age 65
* Pension benefit is provided at no cost to employee
* Employees do not make contributions they are not allowed
* Qwest pays for entire cost and bears the investment risk
The Plan must meet certain criteria established by the IRS and the Department of Labor (DoL). This criteria requires that the funds be set aside in a Trust. At
Qwest, there is $8.245 Billion owed with current assets of $7.66 billion. Assets can only be used for the benefit of plan participants.
Negotiated Occupational Formulas
Pension Band based on job title X Pension Calculation Service (PCS)
Supplemental Benefit (.001 X annual average of supplemental earnings* X PCS)
Age 65 monthly annuity
*Supplemental earnings include differentials, performance bonus payments, In-charge allowance
Sales Consultants Pension Factor using average monthly compensation* X PCS resulting in a monthly age 65 benefit Average monthly compensation is based on highest 60 consecutive months of eligible earnings out of last 120 consecutive months of eligible earnings
* Compensation includes base pay, sales incentives,
overtime, and STD pay
Occupational Benefits are expressed as a Normal Retirement Age monthly annuity (age 65)
At termination of employment or retirement, the age 65 monthly annuity is converted to an immediate annuity and an immediate lump sum
Service Pension Eligible (SPE)
Modified Rule of 75
AGE Years of Service
Any Age 30 years of service
50 – 54 25 years of service
55 – 59 20 years of service
60 – 64 15 years of service
65+ 10 years of service
Modified Rule of 75 applies to Occupational Formulas provides a subsidy to the annuity payment option between ages 55 & 65
SPE determines early retirement reduction for receiving monthly payments prior to age 65
If under age 55 and SPE, a 6% annual reduction is applied for each year under 55
If 30 or more years of service and under age 55, no reduction is applied
If not SPE, the reduction for receiving benefit prior to age 65 is greater. Benefit is treated as a deferred benefit paid at present age.
Currently, if employee is SPE, Retiree Benefits include the following:
* The medical benefits in effect at retirement
* Life insurance and dental benefits
* Telephone Discount
* Retirement Gift
These are subject to change e.g., bargaining Plan provisions govern
Factors that include mortality and interest rates are used to convert annuities to lump sums
The interest rate is based on the average of the 30-Year Treasury rate for the 5 months prior to the month of termination.
Estimates for future dated terminations are based on a 6% interest rate
The lower the interest rate used in the conversion of the occupational age 65 monthly annuity, the larger the lump sum. Conversely, the higher the interest rate, the lower the lump sum.
Pension Protection Act 2006 (PPA)
Legislation did not change the basic calculation of benefits under the negotiated occupational formulas
Most changes were effective 1/1/2008
Changes the interest rate/mortality table used to convert age 65 monthly annuity to a lump sum under the occupational formulas
New interest rates will be phased in over 5 years starting in 2008
Corporate bond rate ( segmented yield curve) will replace the 30-year treasury rate
Currently, the corporate bond rate is higher than the treasury rate
Mortality will be based on the RP 2000 table adjusted for increased longevity
New interest rates will be phased in over 5 years starting in 2008
Single Life Annuity – Monthly benefit paid to you for rest of life
50% and 100% Joint and Survivor Annuity – Reduced benefit paid to you for life with either 50% or 100% continuing to spouse
Life Annuity with Ten Years Certain – Monthly benefit paid to you for rest of life with 120 months of payments guaranteed
Lump Sum – Total value of benefit paid
Combination Payment Option – Lump sum and monthly annuity
50% and 100% Joint and Survivor Annuity Reduced benefit paid to you for life with either 50% or 100% continuing to spouse
Pension Survivor Benefit – Effective January 1, 2009 the Qwest Pension Plan was changed to pay a pre-retirement benefit in all cases when a vested employee dies prior to receiving the pension benefit. The benefit will be paid to a surviving spouse, a named beneficiary or trust or the employees estate.
All employees (married and single) have the opportunity to request and complete a beneficiary designation form at any time prior to benefit commencement that will allow the employee to name any person, trust or the employees estate as the beneficiary for the pension plan benefit if they die as an active employee or before they start receiving their pension benefit. The beneficiary designation will follow requirements of Federal law regarding the required Joint and Survivor benefit and spousal consent rules.
The provisions in the Plan pertaining to Spousal benefits are unchanged. The Plan would provide a benefit to a non-spouse beneficiary, trust or estate based on a 50% Joint and Survivor annuity calculated as if the participant had started receiving the benefit the day before his/her death.
The benefit can be paid as a lump sum if elected within the required time frame.
The surviving spouse will receive the greater of:
(a) the amount the surviving spouse would have received if the Participant had commenced receiving benefits under a 50% qualified joint and survivor annuity on the day before his/her death; or
(b) an amount equal to 45% of the benefit that would have been paid had the participant terminated employment, survived until age 65 and started to receive payments at age 65.
When can I receive my pension?
Upon termination (if vested) – do not have to wait until age 65
Lump sum option available only if election made within 180 days after termination
Election for annuity must be made within 180 days or no retroactive payments will be made
Spousal consent required for election of option other than a 50% or 100% Joint and Survivor annuity.
If participant requests a pension kit at least 30 days in advance of termination date, retirement date is the day following term.
If participant request pension kit less than 30 days in advance of termination date, the pension effective date is 30 days after termination.
Termination must be posted in HR data base by 5th of month, and
Pension forms must be received by 5th of month to paid on the 1st of the following month
Lump sum is taxable as ordinary income
Lump sum payments are subject to an additional 10% excise tax if under age 55 at termination
If rolled over to IRA, not taxed until withdrawn
Annuity payments are taxed as ordinary income you make election on withholding