Boeing workers want their pension back

A sizable portion of Boeing’s striking assembly workers are putting up a fight over an apparently unrealistic demand: the reinstatement of their pension plans.

In 2014, the Boeing Machinists Union narrowly voted in favor of a contract extension that closed the pension plan to new hires and frozen it. From a distance, this seemed like a concession to the fact that pensions were going extinct in the US.

According to benefits experts who spoke to Forbes ten years later, pensions are quietly making a resurgence thanks to improved economic conditions, new regulations, and plan features that lower the risks for employers when guaranteeing workers retirement income for the rest of their lives. In order to help the company retain talent in a competitive labor market, some leaders in the aerospace industry believe Boeing would be wise to comply with the union’s pension demand. According to aerospace experts who spoke to Forbes, Boeing has been plagued by a constant barrage of quality problems, one of which has been largely caused by the loss of skilled manufacturing workers since the Covid pandemic. Members of the Machinists Union may need years to become proficient in complex, mostly manual assembly tasks.

In the 2000s, Cliff Collier, an aerospace consultant who negotiated a pension plan freeze while working as an executive at parts manufacturer Vought Aircraft Industries, said, “No industry benefits as much as ours for having the same person be employed for his whole career.”. He claimed that a pension has an unrivaled ability to keep midcareer employees. It essentially ties you to your job because you leave too much on the table to go elsewhere. “”.

It’s unlikely that the pension will be restored, according to Melius Research analyst Scott Mikus. In his opinion, however, it would also benefit Boeing in the talent war, particularly for engineers who might otherwise choose the West Coast’s cutting-edge tech and space firms. Boeing and Lockheed Martin were essentially the engineering pinnacle in the 1980s. Now, he asked, “Why not work at Open AI, Amazon, Alphabet, and Microsoft where you’re really pushing the boundaries if you’re an engineer and you’re really good?”.

Restoring the pension plan for its 33,000 members who assemble Boeing aircraft in the Seattle area, with retroactive credit for years of service since 2014, is what the International Association of Machinists is requesting. Boeing is adamant that it will not. A statement released by the company on Thursday said, “There is no scenario where the company reactivates a defined-benefit pension for this or any other population.” This came after a tentative contract agreement that included an increase in funding for employees’ 401(k) retirement savings accounts was rejected by 64 percent of members. “Almost all private employers have switched from pensions to defined-contribution plans because they are prohibitively expensive,” the company stated. “”.

Following the vote, Jon Holden, the leader of the IAM local that represents Boeing employees, stated, “The loss of the pension is still right at the heart of this.”. He promised to pressure the business to improve retirement benefits.

It swings back.

Data from the Labor Department indicates that in 1990, about 35 percent of workers in the private sector were enrolled in a pension plan. Due to a decades-long trend of businesses freezing their pension plans or selling them to insurance companies in order to address their deteriorating financial situation, that share had dropped to 10% as of March. A triple whammy fueled the trend in the early 2000s: a sharp drop in interest rates reduced expected future returns on bonds; a steep decline in stock prices during the .com bust depleted pension fund asset values; and a 2006 law compelled companies to increase their contributions to their pension funds to make up for the resulting shortfalls.

However, according to employee benefits consultants, the balance is starting to shift back toward defined benefit retirement plans, such as pensions, in which employers guarantee retirees income until death, as opposed to defined contribution plans, such as 401(k) plans, in which employers assist employees in saving for their retirement, but the employee makes the decisions and assumes the financial risk.

Due to the recent stock market boom, which has increased the asset values of frozen plans that companies still manage for retirees and current employees who have accrued benefits, as well as the few active ones, corporate pension funds are in the best financial shape in decades. In the meantime, the outlook for future bond yields has improved due to the increase in interest rates to over 5%, which has decreased the amount that pension plan managers are required to pay in. According to the financial consulting firm Aon, pension plans at SandP 500 companies are 101 percent funded, which means they have all the resources necessary to fulfill their future commitments. This represents an increase from 74% in 2012.

Congress extended the time allotted to underfunded plan managers during the pandemic, allowing them to reduce their investment levels.

Congress is thinking of lowering pension insurance premiums in order to promote the launch of additional plans.

Zorast Wadia, an actuary and consultant with the benefits company Milliman, stated, “I can’t recall ever a period that has been so supportive of the defined benefit pension plan.”.

Jonathan Price, a benefits specialist at the consulting firm Segal, and Wadia stated that many businesses are thinking about bringing back defined benefits plans, especially in sectors like healthcare where there is a shortage of skilled workers. Price stated that some of his clients are researching the possibility, including defense and aerospace firms.

IBM is at the forefront. Big Blue made headlines late last year when it declared it was stopping contributions to its U.S. employees’ 401(k) accounts. S. . workers and reopening, albeit with a twist, its 2008-frozen pension plan. The salaries of employees in their last years of employment have historically served as the basis for pension payments. Considered a pioneer in benefits, IBM is now offering its employees a cash balance plan, which reduces the employer’s financial risk by promising a conservative rate of return and crediting employees a portion of their salary for each year of service. When they retire, employees can withdraw the remaining balance in their account as a lifetime annuity or as a lump sum.

An additional hybrid pension option that Boeing and the machinists may want to consider is a variable annuity plan, which reduces the risk for employers in the event of poor performance by indexing payouts to investment returns.

I am dying broke.

The growing realization that requiring employees to handle their own retirement funds through 401(k) accounts is putting many in danger is another factor contributing to the renewed interest in pensions. Among the 5 million accounts held with Vanguard, the median balance for working Americans between the ages of 55 and 64 is only $87,000, and only half of households with working Americans in that age range have any savings in an IRA or 401(k). “Having a 401(k) plan or Social Security alone is insufficient for retirement,” Wadia stated. You will never die impoverished or bankrupt if you have a pension plan. “.”.

Because it could save them a significant amount of money, companies like IBM that have overfunded pension funds—that is, more assets than anticipated payment obligations—are more likely to reopen them. IBM will no longer be able to contribute hundreds of millions of dollars annually to 401(k) plans; instead, its new cash balance plans will only be financed by its $3.66 billion surplus in pension assets.

While Boeing’s pension funds aren’t as strong as IBM’s, they are still far stronger than they were ten years ago. Its pension assets, valued at $48.9 billion at the end of 2023, had a funding ratio of 90 percent because they were $5.4 billion less than its anticipated future obligations to retirees. It was only 78% funded in 2014, which is a significant improvement.

similar to a lot of U. S. . companies, which has enabled Boeing to make more cautious investments. As of the end of 2023, fixed income accounted for 60% of its assets, up from 48% in 2014. Boeing’s pension plans were fully funded as of the end of 2023 in accordance with federal regulations.

Restoring the pension in full would be costly; according to Bank of America analysts, it would cost $1.06 billion annually. The strike, which is currently in its sixth week, is also estimated to be costing Boeing $1.05 billion every month. ).

According to Collier, however, Boeing’s pension funds are in a good enough position that it can afford to compromise with the machinists, and the firm stance that employees are taking on the matter puts pressure on Boeing to compromise. They will need to be innovative in assuming some of the risks associated with the workers’ retirement. “”.

Boeing offered a one-time $5,000 contribution to employees’ 401(k) accounts as well as matching employee contributions up to 8% of their pay in the proposed contract that the workers rejected this week. Additionally, it offered to pay transaction fees when employees wanted to convert their 401(k) funds into an annuity.

Collier believes that another aerospace and defense company will eventually reintroduce a defined benefit plan in order to gain ground in the talent war if Boeing doesn’t compromise on pensions. According to financial statements, as of the end of 2023, three companies in the sector—Textron, Huntington Ingalls, and L3Harris—had the financial resources to do so thanks to funding surpluses for their frozen pension plans. RTX came in second with 98.4 percent of the funding, and Northrop Grumman was not far behind at 99.4 percent.

It makes sense to Collier, who laments the wave of pension freezes that turned defense and aerospace workers into “free agents.”. “I’ve never seen a better way to retain highly skilled, highly compensated employees at the same organization than a defined benefit plan. “”.