NEW PENSION LAWS AND WILL THEY EFFECT YOU

FROM THE WALL STREET JOURNAL

Pension Laws and their effect on MEBA retireee. Where was your Union Representation and Political Action when this bill was passed?

Pension Law Shrinks
Lump-Sum Payouts



Changes in Defined-Benefit Plans
Affect Many Highly-Paid Workers;
Making Do With $200,000 Less

By THEO FRANCIS
October 25, 2006; Page D1

When Larry Korwatch began planning his retirement last winter after three decades as a ship's engineer, his pension-plan administrator told him he could expect to walk away with a lump-sum payment of about $1.3 million.

That was before Congress passed sweeping pension-reform legislation in August. Now, Mr. Korwatch has learned that his retirement payout will be cut by about $200,000.

The reason: The new pension law changes the way companies calculate how much to pay retirees who choose to take their pensions in a single payout. Although many retirees opt to receive their pensions as a monthly check, and therefore aren't affected by the changes, the new legislation is expected to reduce the pensions of millions of Americans as they retire in coming years.

SMALLER NEST EGG

A recent pension law is hurting some retirees.

• Rule changes cut payments to workers who take their pension as a lump sum.

• An apparent oversight may have made cuts for higher-paid workers retroactive to January.

• Pensions paid monthly aren't affected by the changes.


Retirement advisers are crying foul, especially because one change introduced by the new law is retroactive to the beginning of 2006 and is affecting people who have already retired or plan to do so soon. "You can't slice and dice a man's nest-egg the year he retires without advance notice," says Joe Clark, an Anderson, Ind., financial adviser with a client whose lump-sum pension was reduced by the change.

The changes affect so-called defined-benefit pension plans, which traditionally provide a monthly payment for life in retirement, based on the retiree's pay and years of service. Some 22 million Americans working at private-sector companies participate in defined-benefit pension plans, about half of whom have the option to take the benefit as a lump-sum payment. Pension experts say most do so, though figures aren't available.

Employees can avoid the pitfalls of the new law by taking their pension as a lifetime stream of paychecks, rather than a lump sum. Many retirement experts recommend that as the safest alternative because it doesn't leave retirees subject to the risk that their investments will fare poorly or that they will spend their assets before their deaths. But this approach can backfire if an employer is on shaky financial ground. Some companies, notably in the airline and steel industries, have filed for bankruptcy in recent years and handed over their pension plans to the federal government, resulting in smaller payouts to some employees.

The latest pension changes come as defined-benefit plans have come under pressure. Several companies have announced plans to freeze their pensions this year, including Verizon Communications Inc. and International Business Machines Corp., preventing employees from earning new benefits. Meanwhile, many employers increasingly emphasize retirement savings plans, such as 401(k)s, in which employees can save and defer income taxes on some of their pay. Many employers contribute to these accounts as well.

The pension law made two changes that effectively reduce payouts when a retiree takes his pension as a lump sum. Companies calculate this by taking the monthly payment the retiree is entitled to and then figuring how much this is worth as a lump sum in today's dollars, making certain assumptions about life spans and future investment returns.

Under the new law, companies starting in 2008 will be able to assume a higher investment return, using a corporate-bond interest rate instead of the lower Treasury-bond rate previously used. This change produces a smaller lump sum payment, because the higher rate represents the return an employee would have to earn to generate the same retirement income as if he were receiving the pension as a monthly paycheck.

This change will be phased in gradually over five years, and people who retire in the next year will see little impact on their payout. "It's going to mean lump sums are smaller for everybody," says David Certner, director of legislative policy for AARP, the seniors advocacy group.

But another change in the pension law has already begun hitting employees, especially highly paid professionals, who have recently retired or plan to retire soon. This change stems from a calculation companies must make that places a cap on the maximum amount a retiree can receive when it is converted to a lump sum. Congress legislates the maximum size of pension payouts because contributing to the plans offers employers certain tax advantages.

For 2006, the biggest annual pension a person age 62 to 65 is allowed to receive from a taxpayer-subsidized plan is $175,000. This cap, which is lower for younger pensioners, increases each year to account for inflation.

The change introduced by Congress affects how much this capped annual amount is worth when companies convert it into a lump sum. In calculating this sum, the new law requires companies to use a higher interest rate -- 5.5%, up from a variable rate that was below 5% most of this year -- as the assumed rate of return, which effectively lowers the maximum allowed lump-sum payment.

That's what caused Mr. Korwatch's pension to shrink to $1.1 million. "It's frustrating," he says about the cut in his expected payout. A co-worker "only has 21 years with the union, and he's getting the same amount as me."

Mr. Korwatch says he's considering delaying his retirement beyond his planned departure next month, when he turns 51, in order to build up a bigger pension. But after some 30 years working at sea in an arduous profession, the Alamo, Calif., resident had been looking forward to retiring.

The rule change won't affect many top corporate executives, because they typically benefit from "supplemental" pensions that make up for any benefits lost to the tax-law cap.

Retirement-industry officials have raised concerns that the rule change affecting pension caps was made retroactive to Jan. 1, which means that people who already took lump-sum payments this year could be asked to return some of the money they received.

"It's terrible," says Ron Gebhardtsbauer, senior pension fellow for the American Academy of Actuaries, a trade association. "We're all scratching our heads and saying, 'You can't do that.' " Mr. Gebhardtsbauer says the Jan. 1 date appears to have been written into the legislation last year, on the assumption that the measure would pass by the end of 2005 or soon after.

Political squabbling delayed passage of the pension bill another eight months, but the date wasn't changed. Pension trade groups have asked Congress to change the effective date for the provision at the earliest to Aug. 17, the day the law was signed.

Mr. Korwatch's pension plan intends to wait for government guidance or corrective legislation before deciding whether to seek money back from those who retired earlier this year, says Allen Szymczak, who administers the plan for the Marine Engineers' Beneficial Association. Whatever happens, "We have to do it by the law," Mr. Szymczak says.

Another complication: Some retirees whose lump sums are capped may be entitled to get some of the forgone benefits back as an annuity, which is paid as a stream of income, in addition to the lump sum, several pension experts say. However, that could depend on the terms of the plan, they say. Mr. Szymczak says the consultants for his union's plan haven't raised this issue.