New Pension Law Stiffs Workers … and Insurance Companies
As expected, the Pandora’s box called the “Pension Protection Act of 2006” is full of nasty surprises. The Wall Street Journal (October 25, 2006) reported that the new “Pension Law Shrinks Lump-Sum Payments” to workers.
See: New Pension Laws Will Alter Capital Flows
Here is how Congress managed to cheat American workers:
Under the old law, when a worker retired with a ‘defined-benefits’ retirement plan, he or she usually had the option of choosing a lump-sum payment instead of a fixed pension for life from the employer.
In calculating the value of this lump-sum payment, the law required the same conservative methods that private insurers use when pricing annuities. In other words, in valuing the worker’s pension, a low interest rate, based on government bonds, was used.
By choosing a conservative rate in valuing an annuity, the present (lump-sum) value of that annuity is greater than it would be if a higher interest rate, based on the riskier corporate bond market, were used.
One reason for a worker to take retirement benefits as a lump-sum payment would be to purchase an annuity from an insurance company in the private sector. With many company pension plans under-funded and with corporations impairing their future solvency by massive stock repurchases and excessive executive pay, the lump-sum payment option was often the prudent decision.
Now, privately insured annuities are generally safer than company pension plans simply because the insurers don’t want to go bankrupt; they select the lowest safe rate of interest when pricing their plans. In other words, they use rates based on US Treasury securities.
Now, the sardonically misnamed “Pension Protection Act of 2006″ has reduced the amount of lump-sum payments on workers’ pensions by allowing companies to use corporate bond rates, rather than US Treasury bond rates when calculating the value of the annuity.
This means that a worker who tries to protect his or her pension plan by choosing a lump-sum payment and purchasing a privately insured plan, is now out of luck, because the insurance companies are not so stupid as to price their product at a higher, speculative interest rate of the corporate bond market. Therefore, switching from a company pension plan to a privately insured plan will mean workers will have a lower monthly payment to face their ‘golden years’.
Of course, a worker can elect not to accept a reduced lump-sum payment and put his or her trust in the financial solvency of the employer. However, if the company goes bankrupt, the pension plan will be taken over by the government’s misnamed, “Pension Benefits Guarantee Corporation”, which usually means that the value of the worker’s pension will be reduced.
Bad New For Life Insurance Companies
By reducing the lump-sum payments on workers’ pensions, Congress also reduced the potential flow of funds from company pension plans to privately insured annuities, thereby stiffing not only workers, but insurance companies.
By reducing the chances of workers’ shifting to private insurers, Congress also increased the chances of company pension plans being delivered unto the tender mercies of the already insolvent “Pension Benefits Guarantee Corporation“, thereby, in the last analysis, increasing the burden on the American taxpayer.
Stay tuned … More unpleasant surprises in the “Pension Protection Act of 2006″ are likely to be revealed as booby traps hidden by corporate lobbyists in this massive piece of legislation are uncovered.
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