USA Private Pensions – Lump-Sum Distributions Become Harder to Get writes Julian Mincer in the Wall Street Journal of May 20, 2009.
The option of a lump-sum on retirement is likely to disappear for a lot of workers this fall reports the Wall Street Journal.
Lump-sums were a common option for workers enrolled in pension plans. However, it is now become rarer because of declining stock values that have sent pension assets plunging just as they have to meet stringent funding requirements. Pensions themselves, of course, are being offered to fewer workers.
Most private company pension plans are expected to be underfunded when the 2009 numbers are run.
WSJ reports that the 100 largest pension plans ended 2008 with $217 billion in liabilities, compared to an $86 billion in surpluses at the end of 2007. The funding status dropped from about 106% at the end of 2007 to less than 80% at the end of 2008.
The Pension Protection Act begins to restrict lump-sum payments when a plan is less than 80% funded, says Judith Mazo, senior VP, director of research at the Segal Co., a consulting firm. At that point workers can receive only half of the amount in a lump-sum with the other half as an annuity. Plans that are less than 60% funded are forced to freeze and provide only an annuity. The limits are designed to prevent participants from draining badly needed cash from the plans. They also give employers an incentive to keep funding at appropriate levels.
It’s interesting to note that in the majority of cases US workers typically chose the lump sum rather than an annuity. Rebecca Davis, staff attorney at the Pension Rights Center, says people must carefully consider their choice. I have all along played out this same advice to UNICEF/UN staff entering retirement, and for this same reason I am recommending to UNJSFP to expand the survivor benefits of the UN pension fund and hence wrote earlier on whether the UN pension discriminates women (meaning surviving female spouses) .
A lump-sum is a lot of money, but a big advantage of an annuity (monthly pension) is that it is guaranteed for life. One good thing is that the Pension Benefit Guaranty Corporation (PBGC) will step in to guarantee a pension; the limit is currently $54,000 a year, however, if workers take the lump-sum they may get more than the PBGC limit, thus they tend to exercise that option. The bad thing is that most private pension funds are not adjusted to reflect increases in the cost of living, so that is another incentive for workers to take the lump-sum. Some people think that they can manage the money better on their own and beat the pension fund, but last year’s market losses illustrate that there are no guarantees.
Now what lessons do we have to learn from the private sector pension plans as compared to UNJSFP?
Well, clearly UNJSPF is not exempt or completely immune from the current economic downturn. The good news is that UNJSPF has restricted lump-sums to not more than one-third, paying out two-thirds as an annuity. UNJSPF also allows “full withdrawal”, but few retirees take this option. Therefore, by leaving two-thirds of each UN participant’s contributions the funds has more money to invest for growth. Also, UN pensions are linked to a cost of living increase, so that is good for the UN retiree.
I personally know of UNICEF/UN retirees who have taken lump-sums and lost it all in the stock market within months leaving them with only the two-third annuity for their retirement years. I have outlined in many postings on this blog (please see list below) that taking a lump-sum is a serious option. If a UN staff has a terminal illness, taking the lump-sum is the better option as on his or her demise the spouse is entitled to receive 50% of the full pension. If the UN staffer plans to live in a developing country where the cost of living is low and the reduced pension will provide a comfortable retirement, then taking the lump-sum is a good option. Taking a full pension is a better option if the UN staffer does not want to be bothered in managing the lump-sum or may risk losing all of it in the stock market. Also lump-sums can be lost to a spendthrift, self or spouse.
Current UN retirees should have little to worry. They’ll continue to receive their pensions that are guaranteed by UNJSPF. However, if the stock market turmoil continues, future retirees can expect less of a pension. What prospective retirees should also do is, through some means (staff associations, for example); judge the financial performance of UNJSPF. For instance, at retirement, if UNJSPF had suffered market losses (like in this economic downturn), then would my pension had been more if it was paid to me, say in those years that the stock market was on the uptick? Also, this is important for UNJSPF Board members to note! Does an economic downturn mean that prospective retirees will now get a lesser pension? If you think of it, if you were running your own individual pension plan (Individual Retirement Account), the less balance you have, the less your monthly payout would be, unless you skillfully factored that it through smart diversification (and that is what pension funds are supposed to do).
I’ll be too happy to talk to prospective retirees in UNICEF, as a group of course. Money does not lead to a happier retirement. Of course, not having enough money in retirement can bring lots of unhappiness, but there is an equlibrium point of happiness and money.
Cheers,
Merrill
Other similar postings in this blog:
1. UN Pension - What CEO said? (2) Financial crisis may impact UN Pension Fund? (3) Are you too late for the party? - Part 1; (4) Are you too late for the party? - Part 2 (5) Pension Pandemonium - A rewind; (6) Pension Payout - Making the right decision? (7) UN Pension - Beneficiary Designation Forms; (8) More retirement blues - Part 1 (9) More retirement blues - Part 2; (9) The pension plan in the extended portfolio; (10) Personal risk and pension. (11) Retirement - how much money do you need to live? (12) A pension primer.
You can access other readings on personal finance at: http://merrillc.typepad.com/2merrill/personal_finance/ and http://merrillc.typepad.com/unwind/personal_finance/ . However, the 12 writings listed above are what I think are most relevant to this current posting.
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