Without any fiduciary-duty reason, each pension beneficiary is forced to select one of two LOSING choices:
1.) a deeply discounted lump-sum payout
2.) an unsecured insurance company annuity.
In Choice 1, the upfront payouts typically are far below the Full Present Value of the lifetime pension-stream obligations. The employer harvests this gap for itself.
In Choice 2, defined-benefit pension beneficiaries relinquish their pension portfolio assets, which had long been dedicated solely to them. These assets are transferred non-recourse to the general account of some insurer, which then owns them free and clear. These beneficiaries receive an unsecured promise from the insurer to pay future retirement benefits. They bear counterparty risk (if the insurer later fails) but enjoy no compensation, for losing both that hard-asset coverage and any US Pension Benefit Guarantee Corporation pension protection.
In either employee choice, the employer unwinds the defined-benefit pension plan, freely walks away from any existent pension plan funding deficit, stops paying PBGC insurance premiums, and offloads all future longevity risk.
It keeps all these cost savings, sharing none with any employee.
Motorola, Verizon, and GM recently did so…..notably right before actuarial tables were updated to reflect much greater US longevity projections. Convenient timing!
Before accepting such annuities, employees were the sole, secured beneficiaries of a bankruptcy-remote pension asset portfolio. Afterwards, they become unsecured claimants on a non-dedicated asset portfolio, commingled with totally unrelated policyholders, exposed to insurer bankruptcy. In such plausible event, they must compete with those other claimants, reliant on meager state-regulated catastrophe pools for partial compensation of unpaid benefits.
What a deal everyone gets…..except all these pension beneficiaries, who bear default-correlation risk exposure to a Too-Big-To-Fail insurer. Many brand-name insurers, once highly rated for claims-paying ability, have either failed or hit financial distress, forcing policy benefits cuts, premium increases (whether annuity, long-term care, life, or investment policies), or even full-blown bailout.
· Confederation Life
· Baldwin United
· Executive Life.
The employees should be allowed a third choice…..to do nothing and just keep intact their existing pensions.
What happened to concept of fiduciary duty? This may be the next big Too-Big-To-Fail systemic risk event.