Delta Moves to Cash Balance Plan

November 18, 2002 ( - Delta Air Lines is converting its traditional defined benefit pension plan for non-pilot US workers to a cash balance arrangement.

The ailing Atlanta-based air carrier announced in a press release that its move to the frequently controversial cash-balance arrangement as of June 30, 2003 should save it about $500 million over five years compared to the current plan.

The company is trying to slash $2.5 billion in costs from 2003 to 2005; it has already cut $1 billion, Delta said.

In a cash-balance plan (technically considered a defined benefit plan) employees get individual accounts and are generally provided regular statements showing their account’s value. The employer credits the employee’s account with income based on a pre-determined formula.

New Workers to Get Only Cash-Balance Option

In its announcement, Delta said:

  • current employees as of June 30 will have a seven-year transition to the new plan until June 30, 2010. During that time, the workers will earn either the current plan benefit or the cash balance benefit, whichever is greater. That should mean current workers wouldn’t get hurt by the transition, Delta said.
  • employees hired after June 30, 2003 will get only the new cash-balance program.

The cash balance retirement benefit will be equal to the value of the account and can be taken as a lump sum or an annuity whenever the employee leaves Delta, even if that occurs before retirement, the company announcement said.

“As Delta works to recover from the current financial crisis, the company must act to control the high and rapidly growing costs of retirement benefits while protecting the interests of Delta people,” said Bob Colman, Delta executive vice president – Human Resources, in the statement. “Unless these steps are taken, Delta’s retirement expenses would increase at an unsustainable rate.”

Potential Problems

Cash balance arrangements have come under fire in recent years because of  several potential problems :

  • older workers can end up with less since benefits generally accumulate evenly throughout a career. So, a person with 20 years to accumulate benefits will get more than one with five.
  • actuarial assumptions made during the conversion could reduce a participant’s benefits.
  • many employers undergoing a plan conversion have communicated poorly with employees about the benefits they can expect.