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Climbing Interest Rates Threaten to Shred the A-Plan

By Paul J. Carroll, CFP®April 11, 2022July 15th, 2022Videos


If you’re a United Airlines pilot, specifically an ex-Con and you know who you are, watching interest rates go up and the balance of your defined benefit pension drop, is somewhat startling. What are you to do?

There’s a saying in the business, an airline gets the union they deserve, and during the financial crisis of 2008, the great relations that existed between Continental Airlines and their leadership team was about the only major airline to hold onto the lump sum for their employees. Gordon Bethune, Herb Kelleher and subsequently Greg Brenneman, they were the gold standard in airline management. Both Southwest and Continental survived that awful period better than anybody else.

Now ex-Cons, as I said, you know who you are, their lump sum was frozen. But at least it existed. They had benefited subsequently from a systemic fall in long term interest rates that just kept coming down further and further and further. The interest rate factor previously, and commonly referred to as the gap rate, that calculation led to the lump sum being boosted, year in, year out. It even made sense to defer receiving your lump sum after you’d retired, maybe as long as seven years. It would just keep growing. We were seeing growth rates of five to 8%. As a result of interest rate drops of up to 1%. It was free money.

Well, ladies and gentlemen, that party is over. Interest rates are rising, and it looks like a systemic climb that may last for years. The Fed, Quantitative Easing, inflation, all of these elements suggest that you’re going to see short, medium and intermediate interest rates go up. We’re seeing it in mortgages. Mortgage rates are almost 5%. This is going to affect those lump sums.

The drop in the value of the United Airlines lump sum at July 1st because of the already existing interest rates in the calculation, suggests that it doesn’t make sense to defer retirement beyond July 1st, if you’re leaving this year. Now I say suggest. There’s always some moving parts to this, and we always want to run the numbers. But if you’re deferring your pension, you’re already retired. Almost certainly that party is over. It’s time to cash in.

Let us know. We’ll rerun the numbers for you. We’re a fiduciary firm with intimate knowledge of United Airlines Continental defined benefit plan. The Continental pilot retirement plan. We have tools to help you make an informed decision. If you’re retiring later this year and early next year, you need to talk to us, let us run the numbers. There’s more than meets the eye to this. You also have lost earnings, not just lost defined benefit value. We don’t want you to jump unnecessarily or unnecessarily soon. Clients reach out. Your advisor knows how to run the numbers. And pilots, if you’re an ex-Con and you know who you are, call us, so we can help you navigate the difficult choices ahead.

“Interest Rates & Factors.” Pension Benefit Guaranty Corporation,

Founder & CEO at Avion Wealth

Paul is the founder and CEO of Avion Wealth, LLC. He leads a team of wealth managers in building and executing financial plans for high net worth individuals and families. Contact Avion Wealth to speak with a financial advisor.