New Pension Law

[Helena]

Hi!

I have been reading this forum
for awhile, but this is my first post.


I can take early retirement next year.
but I had planned to work a couple
of years beyond. My company has
a pension. I can take a lump sum
distribution which is calculated using
the GATT rate [ 30 year treasury.]


Now here comes the new pension law
that takes affect in 2008. Per the article
linked below, this law will negatively affect
the value of pension lump sums beginning
in 2008, by changing the interest rate used
for the lump sum calculation from treasury
to corporate bonds.

[ Bush has already signed this into law. ]



Can anyone here explain this further ?

What is your advice ?



Pensions take their lumps

Most people who take lump-sum distributions from their defined-benefit pension plans will get slightly less starting in 2008, thanks to a provision in the pension bill awaiting President Bush's signature.


http://www.sfgate.com/cgi-bin/article.cgi?file=/chronicle/archive/2006/08/10/BUGRUKEMBV1.DTL


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[Helena]

Here is a link to more information
concerning the new pension law's
affects on lump sum distributions.

http://www.pensionrights.org/policy/legislation/lumpsumir.html


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[2B]

Based on the two posts, you are probably more at the mercy of how interest rates move between now and when you will actually retire.

Corporate bond yields are about 1 - 1.5% above treasuries but the longevity is increased which may more than offset this. Both seem reasonable changes to reflect "reality" for most retirees.

 

[Helena]

I've been watching the 30 year Treasury rate.

The trend was up during the Fed interest rate increases...
but since the Fed has stopped, the rate is going down
slightly... if a recession hits next year [ as some are
predicting ] the rate should move further down.

The LOWER the interest rate the HIGHER the lump sum !

 

[Alan]

The new rules don't come into effect umtil 2008 and then are phased in after that over 5 years, so you have well over a year to decide, and what you also need to do is calculate how much extra benefit you are earning by continuing to work. I think you have plenty of time to make your decision.

For example. If you are in a pension scheme where every year of service adds 1/60 of your average annual salary over the previous 3 years and you are earning 30,000/year then every year worked will add an extra 500/year to your pension (and thus increase the lump sum).

I think during the next year or so you can use your company's formula or have HR run the numbers for you.

 

[MasterBlaster]

Well here is my take on it...

long Corporate bond rates are around 2 percent greater than long treasury rates.

The greater interest rate will decrease the value of the lump sum by around 20 percent.

So in effect, the pension legislation legally allows your company to pay people retiring after the phase-in of rates 20 percent less than they should.

The (net-present) value of a lump sum is, of course, dependent on the amortizized payments and the expected lifespan over which the payments are delivered. The 20 percent reduction is based on 5/7 percent Treasury/Corporate rates and a 30 year average lifespan payout.

They just reduced everyones pension payout. Where are the headlines ? Where is the outrage ?

I guess this is the trend. Find some sneaky way to cut everyones payout and then don't tell them.

This is the sort of thing we can expect in SS and medicare. Stay tuned...

 

[Texas Proud]

If you do not have a defined benefit plan... I would think this does not affect you at all.... most companies have dropped them..

My company has a cash balance account.... I know what I will get. No discount needed.

 

[haha]

Well here is my take on it...

long Corporate bond rates are around 2 percent greater than long treasury rates.

The greater interest rate will decrease the value of the lump sum by around 20 percent.

So in effect, the pension legislation legally allows your company to pay people retiring after the phase-in of rates 20 percent less than they should.

The (net-present) value of a lump sum is, of course, dependent on the amortizized payments and the expected lifespan over which the payments are delivered. The 20 percent reduction is based on 5/7 percent Treasury/Corporate rates and a 30 year average lifespan payout.

They just reduced everyone’s pension payout. Where are the headlines ? Where is the outrage ?

I guess this is the trend. Find some sneaky way to cut everyones payout and then don't tell them.

This is the sort of thing we can expect in SS and medicare. Stay tuned...

Well, as I see it they are not doing anything sneaky at all. They are replacing an annuity backed by a corporation, by a bond equivalent backed by a corporation. If you don't like it, take the annuity.

Upping the security from one’s corporate pension plan to a AAA treasuries was an unjustified gift to retirees.

If anyone should be outraged, it is the shareholders who have been unjustifiably subsidizing retires all these years. High time it got stopped.

Ha

 

[Helena]

If you do not have a defined benefit plan... I would think this does not affect you at all.... most companies have dropped them..

Several hundred ( at least ) " grandfathered " employees
at my company still have the old defined benefit pension
plan... me included.

If the 30 year treasury rate drops below 4.80% this time
next year, I will probably be bailing out...


... or face the great unknown.

 

[Texas Proud]

Several hundred ( at least ) " grandfathered " employees
at my company still have the old defined benefit pension
plan... me included.

At our company.. .they calculated the value of your pension and put that as the starting point for your cash balance account... nobody was grandfathered.... but yes, look to see if the discount rate is good for you... or as someone else said, take the annuity..

Remember, what was promised was the annuity, not a lump sum payment...

 

[Helena]

Fallout ?


DuPont to cut pension contributions

Aug. 29, 2006

NEW YORK—DuPont Co. said it would cut its contribution to workers' pensions
by two-thirds after 2007, part of a growing move by U.S. companies away from
traditional defined benefit plans.

**

DuPont is among the first major U.S. companies to cut pensions after
U.S. President George W. Bush signed into law earlier this month
new rules meant to overhaul the U.S. pension system.



link to article

 

[2B]

Fallout ?


DuPont to cut pension contributions

Aug. 29, 2006

NEW YORK—DuPont Co. said it would cut its contribution to workers' pensions
by two-thirds after 2007, part of a growing move by U.S. companies away from
traditional defined benefit plans.

The Law of Unintended Consequences will hit our pension plans bigtime -- not that it matters to me anymore since I don't have much of any. Our Congress "solved" the problem of underfunded pension plans during downturns which they had caused by earlier pension regulations that prevented them from being "overfunded" in good times (avoided income taxes). The financial impact will be so great to many companies that if they can fully fund their pensions now they will probably end them. The only plans left will be the companies in financial trouble that can't make up their pension shortfall.