Home > News > Asset Management Culture > Air France–KLM Completes De-Risking of Pension Plans
Asset Management Culture

Air France–KLM Completes De-Risking of Pension Plans

The airline struck a deal with five unions to convert a ground crew pension into a defined contribution plan.

By Michael Katz

It has taken airline operator Air France–KLM several years, but it has finally completed the de-risking of its three main Dutch KLM pension plans in a move it says will create more predictable annual contributions and less balance sheet volatility.

The airline reported late last week that it had reached an agreement with the five Dutch ground unions in KLM to convert the pension plan for its ground staff into a collective defined contribution (DC) plan. Under the terms of the deal, KLM agreed to a modest increase in its annual pension premiums from January 2021, and will pay a one-off contribution of €49 million ($59.4 million) to the ground pension fund this month.

The money for the one-off payment had been set aside since 2014, when the airline agreed with the unions to do so in exchange for paying lower pension premiums to the KLM ground pension fund following changes to Dutch pension regulation. Citing International Accounting Standard rule 19, the airline said the de-risking of the ground pension fund will lead to the derecognition of the so-called “pension asset,” which will no longer appear on Air France–KLM’s balance sheet.

For more stories like this, sign up for the CIO Alert newsletter.

The airline said the pension asset totaled €211 million on the balance sheet as of the end of 2020, and ballooned to €551 million during the first quarter of this year due to the higher discount rate and positive returns on assets under management (AUM). The company also said the impact of the derecognition of the pension asset, the one-off contribution, and the additional pension premiums will be taken as a non-current expense, and that the actual amounts will be calculated and recorded in the second quarter of 2021.

In 2015, KLM began negotiations to adjust the pension plans of its cockpit and cabin crews. After striking a deal with the pilots in 2015 that allowed an increase in the age of retirement, KLM and the Dutch Airline Pilot Union VNV reached an agreement that, among other things, converted the pension into a collective DC plan. As part of that agreement, KLM made a one-off lump-sum payment of €194 million to the pension fund.

Related Stories:

Special Report: The State of Pension Risk Transfers

Surging Stocks Improve Pension Funding Levels, But De-Risking Isn’t at Risk

De-risking Corporate Pension Plans Is Getting Tougher

Tags: , , , , ,

Home > News > Pensions > Despite Market Rebound, Rising Unemployment Hurt Public Pensions
Pensions

Despite Market Rebound, Rising Unemployment Hurt Public Pensions

A report from the Center for Retirement Research finds that layoffs led to increased contribution rates.
By Michael Katz

KEY TAKEAWAYS

  • The aggregate funded ratio for public pensions rose to 75% from 73% from fiscal year 2020 to 2021, while contribution rates rose to 22% from 21% of payrolls.
  • Cuts to the state and local workforce impacted public pension finances in fiscal year 2021.
  • While the cuts had little impact on funded status, they led to a rise in contribution rates.

Although cuts to state and local employment in response to the COVID-19 pandemic had only a minor impact on public pensions’ funded ratios, they did cause a rise in the required contribution rates, according to a recent report from the Center for Retirement Research (CRR) at Boston College.

The report said that despite better-than-expected revenue for state and local governments during fiscal year 2020, a “dramatic reduction” in the size of the state and local workforce has negatively impacted public pension finances. State and local governments laid off nearly 1.5 million workers between March and August 2020, which represents an approximate 0.5 percentage point drop in state and local government employment as a share of the total US population.

For more stories like this, sign up for the CIO Alert newsletter.

A 0.5 percentage point drop might not seem like much in response to a major event like a pandemic, but the report said it is similar to the decline seen in the wake of the 2008-09 financial crisis, but that drop took place over a much longer period of time.

It also said that while it might seem like lower employment would improve the finances of troubled pension systems because fewer employees means fewer pensions, the decline in payroll can adversely impact plan finances in two ways: reduced employment can lead to less funding and higher required pension contributions, as well as increase the required contribution rates by lowering the payroll base.

According to the report, the aggregate ratio of assets to liabilities for public plans rose to an estimated 74.7% in 2021 from 72.8% in 2020. Despite the projected improvement, the funded ratio is still about 1 percentage point below levels reported more than a decade ago. At the same time, the average actuarially determined employer contribution is estimated to have risen to 22% of payroll from 21.3%.

Because just under half of the 200 major state and local government pension plans in the Public Plans Database (PPD) reported their 2020 funded levels as of May of this year, and none had reported 2021 levels, the report made plan-by-plan projections using data provided in each plan’s most recently released reports.

“The decline in payrolls during COVID caused funded ratios and required contribution amounts to be only slightly worse than they would have been if payrolls had grown as expected,” the report said. “That said, the required contribution rate increased more noticeably due to the lower payroll base, over which the slightly higher required contributions are now expressed.”

The report also noted that some plan sponsors have shifted to charging amortization payments as a fixed-dollar amount rather than a percentage of salary. It said that doing this would remove the potential for unintended underfunding going forward and, if amortization payments are reported as a dollar amount, it would reduce the appearance of rising contribution rates whenever employment declines.

Related Stories:

4 Public Pension Funding Strategies Besides Employer Contributions

State Pension Funding Drop to Lowest Level in 30 Years, Wilshire Says

10 Ways to Close Public Pension Funding Gaps

Tags: , , , , ,

«