DETAILED AND LENGTHY
HISTORY OF THE DISABILITY AND SURVIVORSHIP PLAN
(D&S PLAN)
By Ev Gost
Revised 5/17/10 

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. 

Prior to 1972, financial protection against disability normally was obtained through the purchase of loss of license insurance from either the Air Line Pilots Association (ALPA) or private insurance companies. In 1972, Delta Air Lines, with a plan to provide disability and survivorship benefits to the non-contract employees, offered the concept of such a plan to ALPA as part of the contract negotiations that were in progress at that time. Consequently, the Delta Pilot Disability and Survivorship Plan (D&S Plan) was established to provide disability benefits for disabled pilots and survivors’ benefits for eligible family members of deceased active and retired pilots. A separately funded IRS 501 (c) (9) trust, the Delta Pilots Disability and Survivorship Trust (D&S Trust), was established to pay benefits under the Plan.

Although ALPA did not initially propose to establish the D&S Plan, ALPA agreed to contractual concessions in order to obtain conservative actuarial assumptions and desired provisions in the D&S Plan. Assessing the rate at which pilots would become disabled was difficult because very little historical data existed. One of the actuarial assumptions established an assumed interest rate of 6.5% versus the Delta proposal of 10%.

ALPA’s insistence upon the usage of conservative actuarial assumptions resulted in plan contributions that far exceeded plan expenses in the early years of the Plan. The assets of the D&S Trust grew over time to 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. The favorable funding level of the D&S Trust was attributable to the conservative actuarial assumptions, assumptions that arguably may be considered to have been “bought and paid for” through contractual concessions in the 1972 and subsequent Pilot Working Agreements. 

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 adopted by some other 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. Secondly, 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. Thirdly, 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. The new defined benefit retirement plan had a similar variable feature.

There are several aspects of the 1972 contract negotiations that may have influenced the final design of the D&S Plan. First, Delta proposed transitioning the pilots from the existing combination of defined benefit and defined contribution retirement plan to only a defined benefit retirement plan. Secondly, the merger between Delta and Northeast necessitated consolidation of the pilot working agreements.

An understanding of the changes that were made to the retirement plans is helpful in understanding the formulation of the D&S Plan. The Delta Pilots Retirement Plan (DPRP) (established in 1972) provided for a defined retirement benefit in the amount of 60% of the final average earnings. The DPRP also contained a minimum benefit for pilots previously hired by Delta or Northeast Air Lines. In the case of married pilots, the minimum retirement benefit required a joint life and survivorship reduction even though a joint life annuity was not provided by the retirement plan.  

In the 1990’s this reduction allegedly ranged from $1,000 to $4,000 per month.

In 1996, the ALPA Delta MEC explained the reduction by stating, “Under the terms of the minimum benefit negotiations in 1972, the company receives credit for survivors’ benefits from the D&S Plan by applying an automatic Joint Life and Survivorship (J&S) reduction if the pilot is married at retirement.”  Accordingly, the reduction appears to inextricably tie D&S Plan survivors’ benefits to the pension plan, an aspect that may support the concept of a vested benefit. It is difficult to imagine that the D&S Plan Survivors’ Benefit for which certain minimum benefit retired pilots have paid a healthy price can be subject to modification or termination.

A brief review of single life and joint annuities may be helpful at this point. A single life annuity is payable for the lifetime of the annuitant (the retiring pilot in this case). When the pilot dies, the annuity ceases. A 50% joint life and survivorship annuity is payable at a reduced amount for the lifetime of the annuitant (retiring pilot) and payable at one-half of the reduced amount for the lifetime of the surviving spouse.

ERISA, which became effective in 1974, mandated that a joint life and survivorship annuity become the standard form of the retirement benefit. Under ERISA regulations, the option of a single life annuity is available only if a spouse gives written consent. Even under the ERISA mandated changes to DPRP, the joint life annuity reduction (in retirement benefits) remained intact under the minimum retirement benefit without actually providing a joint life annuity. If the spouse did not consent to a single life annuity from the retirement plan, a pilot retiring under the minimum benefit formula was subjected to an additional joint life annuity reduction in retirement benefits.

In 1990, Delta and ALPA agreed to a modification of the retirement plan which provided each retiring pilot with the option of receiving a lump sum distribution on the variable portion of the retirement benefit. Consequently, the D&S Plan began to recognize the actuarial equivalent of the lump sum distribution as an offset to the disability benefit. Survivors’ benefits under the D&S Plan remained unchanged.

There were amendments to the D&S Plan that were related to the merger with Western Air Lines in 1987 and the acquisition of Pan Am assets in 1991. The D&S Plan was revised and restated in 1996.

The year 2000 Pilot Working Agreement included a number of provisions that modified the D&S Plan. Some of those modifications were as follows:

1. Delta obtained the option of paying the company provided portion of post-retirement medical and dental claims from accumulated surplus funds in the D&S Trust. For this purpose, surplus funds are considered to be those in excess of 110% of the present value of future liabilities.

2. Documentation of continuing eligibility for disability was modified for disabling event dates occurring after September 1, 2001.

3. The remarriage penalty was deleted for survivors of pilots who died after the effective date of the agreement. Prior to that date, benefits of survivors of pilots who did not retire directly from active service, would cease if the surviving spouse remarried.

In early 2002, Delta and ALPA agreed to modify the proof of continuing disability requirements under the D&S Plan for retirement dates that occurred on or after October 1, 2002. For disabled pilots whose event dates occurred after September 1, 2001, and whose retirement was on or after October 1, 2002, proof of continuing disability could be required for up to two years following the retirement date.

In November 2004, Delta and ALPA agreed to modify disability benefits for event dates occurring after November 11, 2004 including the following modifications:

1.     The monthly disability benefit was defined to be the lesser of

(a)   80 hours of the composite hourly rate in effect at the time of the pilot’s event date, or

(b)  50% of the average monthly earnings (highest 12 consecutive months out of the last 36 months).

2.     The reduction to the LTD benefit for retirement benefits included an actuarial equivalent for the value of the new defined contribution retirement plan.

3.     Disability benefits were limited to a total of 24 months for disabilities related to alcoholism, drug abuse or psychiatric conditions.

During bankruptcy proceedings Delta and ALPA negotiated Letter of Agreement #51 which included the following changes to the D&S Plan.

1.     Disability benefits cease at the mandatory FAA retirement age. Alternatively, disabled pilots receive defined contributions to their retirement account in the amount of 22% of their LTD benefit.

2.     Offsets to LTD benefits were redefined.

3.     Beginning in Jan 2008, survivorship benefits under the D&S Plan were replaced with Life Insurance.

4.     Delta was authorized to spend $60 million annually from the D&S Trust to pay for pilot sick and vacation pay.

5.     Delta became an additional source of payment of D&S Plan benefits.

6.     Beginning in 2011, if the assets of the D&S Trust fell below $1.2 billion, Delta would be required to make contributions to the trust in the amount of 4% of Free Cash Flow, but not to exceed $60 million annually.

Delta and the Pilot Committee for Section 1114 agreed to a stipulation that the provisions of LOA #51 would not be enforceable on retired pilots (including disabled, but not retired, pilots over age 60) before either receiving approval of the Section 1114 committee or an order of the bankruptcy court. Additionally, there was a recognized disagreement relating to the legality of the annual expenditure of $60 million of D&S Trust assets to pay pilot sick pay and other legally permissible benefits.

Delta subsequently withdrew proposals to alter retiree D&S Plan benefits (including those contained in LOA#51).

Following emergence from bankruptcy, there have been additional modifications to the D&S Plan. The most notable modifications relate to the merger with Northwest Airlines. Because former Northwest Pilots require additional expenditures from the D&S Plan to cover disability benefits and life insurance, Delta is required to reimburse the Plan for such expenditures.

Historically, modifications to the D&S Plan have been prospective rather than retrospective. Although the establishment of the D&S Plan pre-dates ERISA regulations, the D&S Plan now is defined as a Welfare Benefit Plan. The D&S Plan contains a Right of Revision (ROR) clause; however, the Pilot Working Agreement restricts amendments to the Plan.

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