Sheet Metal Workers' International Association
Local Union No.73
Pension Welfare and Annuity Funds
May 7, 2007
SHEET METAL WORKERS’ LOCAL NO. 73
PENSION PLAN
Dear Participant:
In 2004, the Federal Government enacted legislation that requires pension plans such as ours to provide participants and others related to the Plan with funding information about their plans. You will receive this annual funding notice in the mail shortly. This letter is an explanation of what some of the information in the notice means to you.
How Our Plan Works
To help you understand the Plan’s current funded status, it’s helpful to understand how the Plan works.
- Participants working today are earning benefits. Benefits accrue based on the number of pension credits you earn before retirement and the rate(s) for each period of accrual. For some participants, benefits will not be paid until many years in the future. Other participants are already collecting benefits, and may continue collecting benefits for many years.
- Employers contribute to the Plan on your behalf based on your collective bargaining agreement. Contributions are “pooled” and invested. Contributions and investment earnings accumulate; these are the assets of the Plan. These assets are then used to pay benefits to participants and other beneficiaries as well as pay administrative costs.
- Since some of the benefits being accrued today will not be paid for many years, it is not necessary to have all of the money today. However, the goal is for the Plan to have enough money to pay retirement benefits both now and in the future.
Funded Percentage
The “Funded Percentage” is one measure of the Plan’s progress towards the goal of having enough money to pay retirement benefits both now and in the future. It measures the assets the Plan has now against the current value of benefits already accrued. It does not take into account benefits that will accrue in the future, nor does it take into account income from future contributions.
Funding a pension plan is like buying a home. You will likely take out a mortgage loan to pay for the home. As you make mortgage payments, your equity in your home (the portion of the home that is “yours”) grows. The “Funded Percentage” is like your equity in the home. While the goal is to ultimately own your home (a Funded Percentage of 100% or more), the amount of equity you have in your home today does not indicate your ability to meet that goal in the future. |
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The Effect of Interest Rates
Whenever you save money to pay any debt in the future, the interest rate that you earn on your savings is very important, and it becomes more important the longer you have to save. The higher the return on your savings, the less money you will need today to accumulate the same amount in the future. This is also true for a pension plan that invests money today to pay benefits in the future.
The Pension Plan’s actuary assumes (and federal law allows the actuary to make this assumption) that, over the long-term, the Plan’s investments will return 7.25% per year. The Pension Plan uses professional investment managers to invest Plan assets. These professionals consider the Pension Plan to be a long-term investor and they have advised the Trustees accordingly. Using this long-term interest return assumption of 7.25%, the Plan’s funded percentage is 88.83%.
The “funded current liability percentage” that will be disclosed in the funding notice you will be receiving shortly, is required by statute to be valued at a current market rate of return. This rate will be different each year, since it is based on recent bond rates. The required interest rate is currently 5.90%. On this basis, the Plan’s funded percentage is 67.94%.
In making this comparison, we are not suggesting that the Plan actuary’s 7.25% interest rate assumption is right and the 5.90% interest rate imposed by the statute is wrong. We are simply showing that, in calculating the cost of paying pensions in the future, the amount of earnings on the Plan’s investments is critically important.
PLEASE NOTE!
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In Closing
The Sheet Metal Workers’ Local No. 73 Pension Plan is designed to provide you with retirement income to reward you for your service. Along with Social Security and personal savings, the Plan’s pension benefits are an important part of helping you realize your retirement goals. We are committed to protecting the long-term financial stability of the Plan and the payment of pension benefits to all current and future pensioners.
If you have questions about this letter or the annual funding notice upon receipt, you can call or write to the Plan Administrator who will present your question to the Board of Trustees.
Sincerely,
Board of Trustees
Sheet Metal Workers’ Local 73 Pension Fund