HISTORY OF THE DISABILITY AND SURVIVORSHIP PLAN (D&S PLAN)
The information contained in this article is based upon the
research and opinions of the author. No warrantees are made or
implied as to the accuracy of the information contained herein.
ESTABLISHMENT OF THE PLAN:
The Delta Pilot Disability and Survivorship Plan (D&S Plan) was
established in 1972, as part of the contract negotiations that
were in progress at that time with the Air Line Pilots Association
(ALPA). ALPA agreed to contract concessions in order to obtain
conservative actuarial assumptions relating to the required
funding of the D&S Plan.
FUNDING OF BENEFITS:
The Delta Pilots Disability and Survivorship Trust (D&S Trust) was
established as a funding source for the payment of benefits, with
Delta making contributions to the Trust.
In the early years of the D&S Plan, assessing the rate at which
pilots would become disabled was difficult because very little
historical data existed. ALPA’s insistence upon the usage of
conservative actuarial assumptions resulted in plan contributions
that far exceeded plan expenses. Accordingly, the assets of the
D&S Trust grew over time to well exceed plan liabilities. In fact,
in the period 1994-1995 when Delta adopted SFAS 112, which
required the recognition of liabilities for post employment
benefits, Delta recorded an after-tax transition benefit in the
amount of $114 million primarily due to the over-funded status of
the Company’s D&S Plans.
Contributions to the D&S Trust have been minimal if at all in the
last decade. Recent amendments to the funding of benefits are
discussed below under IMPACT OF BANKRUPTCY.
BENEFITS UNDER THE ORIGINAL PLAN:
The D&S Plan, the first of its kind in the airline industry,
included three provisions that were not common in many disability
and survivorship plans subsequently adopted by legacy carriers.
First, the plan established a disability benefit (50% of recent
earnings) that did not terminate upon retirement, but continued
for the pilot’s lifetime or until he regained his license to fly
as an airline pilot. The plan was designed to provide the greater
of either the disability or the retirement benefit. To accomplish
this goal, the disability benefit was reduced dollar for dollar
(but not below zero) by the amount of any retirement benefits
actually received by the disabled pilot. Second, the plan provided
for a survivors’ benefit that was distinct from, and in addition
to, any joint life annuity that was elected under the retirement
plan. Third, the disability and survivorship benefits included a
variable feature on one-half of the initial benefit payable under
the D&S Plan. Accordingly, favorable investment performance of the
D&S Trust could provide for increases in the variable benefit over
time.
IMPACT OF BANKRUPTCY:
Although the D&S Plan was amended over time, the most significant
amendments have occurred since Delta filed for bankruptcy in
September 2005. None of the recent amendments modify the D&S Plan
benefits of retired pilots and survivors; however, there may be an
indirect impact on the long term continuation of these benefits.
The Letter of Agreement #51 between Delta and ALPA included a
number of modifications to the D&S Plan. Some of the changes were
determined to be unenforceable on pilots who retired before June
1, 2006. The modifications are summarized as follows:
Beginning in 2008, survivor benefits are replaced by life
insurance. This provision does not apply to pilots who retired
before Jan 2008.
Additional expenditures of up to $60 million for 2006 and $60
million every year thereafter were authorized for the payment of
pilot sick and vacation from the D&S Trust.
Beginning in 2011, Delta will be required to make contributions
to the D&S Plan only if the assets of the Plan are less than
$1.2 billion. The contributions will be 4% of free cash flow or
$60 million, whichever is less.
Delta becomes an additional source of funding D&S Plan benefits.
New offsets are applicable to Long Term Disability (LTD)
benefits.
LTD benefits cease at the FAA mandatory age; however, LTD pilots
will receive contributions to their defined contribution
retirement accounts until reaching the FAA mandatory retirement
age.
The reduction to LTD benefits for retirement income is the
amount of retirement income that would have been paid if the
retirement plans had not been terminated.
A new medical review process was established for determining
eligibility for LTD benefits.
A bankruptcy court stipulation entered on May 31, 2006, eliminated
the enforceability of items 5 through 8 on pilots who retired on
or before June 1, 2006 (including disabled, but not retired,
pilots over age 60).
Another impact of bankruptcy on a number of disabled pilots
relates to the settlement for lost non-qualified retirement
benefits. Under the settlement, disabled pilots were allowed to
participate in a claim for lost non-qualified retirement benefits
only to the extent that they suffered actual economic loss when
considering “make-up” payments from the D&S Plan.
Because the settlement was based upon projected loss of
non-qualified benefits over the remaining life expectancy of the
pilots, the settlement implies that disabled pilots will receive
“make-up” payments for their life times. Delta’s reservation of
the right to terminate or modify the D&S Plan appears to be in
direct contradiction of the terms of the non-qualified settlement.
IMPORTANCE OF THE D&S TRUST:
Although Delta has stated intentions to maintain the D&S Plan
indefinitely, Delta insisted upon language in the Plan of
Reorganization (POR) that provides a loop hole around those stated
intentions. The POR states, “Except as expressly set forth in the
Retiree Term Sheets, the Reorganized Debtors may unilaterally
modify or terminate any retiree benefits (including health and
welfare benefits) in accordance with the terms of the plan,
program policy or document under which such benefits are
established or maintained….” As a result of efforts by John
Erickson’s group, DDPA, the following additional clause was added,
“provided, however, that nothing herein shall be construed to
enlarge the Reorganized Debtors’ rights to modify such retiree
benefits (including such retiree benefits that are vested, if any)
under applicable non-bankruptcy law.”
If D&S Plan is terminated, the assets of the Plan (D&S Trust) are
preserved to pay disability and survivorship benefits. Therefore,
the funding of the D&S Trust provides the ultimate security for
D&S Plan benefits.
