Reintroducing pensions to the USA

The American Department of Labor is demanding that regulated sponsors of their workplace pensions convert participants’ account balances into an estimated monthly income stream at retirement. This follows primary regulation in Congress last year know as the SECURE Act

Using assumptions set forth in the regulation, plan administrators will show participants equivalents of their retirement savings as monthly income under two potential scenarios — first, as a single life annuity; and second, as a qualified joint and survivor annuity that factors in a survivor benefit,

In a very balanced article on the American website Pensions and Investment, Brian Croce explains

It won’t be long before defined contribution plan sponsors governed by ERISA must provide participants with an annual lifetime income disclosure, a fact that is leading retirement community stakeholders to either count down the days with anticipation or trepidation.

The disclosures would use prescribed assumptions = designed to give savers a realistic illustration of how much monthly retirement income they could expect to purchase with their account balance. And the retirement plans will provide explanations about the lifetime income forecasts — based on a participant’s current account balance — and the assumptions used to calculate the forecasts, the interim final rule states.

There appear to be two principle objections thrown up by the US pension industry

Such disclosures might put savers off when they discover they won’t be getting very big pensions from their savings.
Employers , sponsoring plans, may be mistaken for guaranteeing whatever level of income is disclosed.

Don’t tell savers how it is, sell them jam tomorrow

Rather than bamboozle savers with hard facts, those responsible for administrating these disclosures “think record keepers should actively encourage participants to use modeling tools to develop a more robust and detailed forecast that could accommodate estimates of future earnings”.

Those familiar with the shenanigans surrounding UK pension dashboards will find sad echoes in calls to encourage plans to either illustratively project current balances to retirement age or encourage participants to use Labor’s calculator to do their own projections,” to illustrate the income value of continued saving.

2. Confusing savers with the idea that they might get a pension

Will Hansen, executive director of the Plan Sponsor Council of America and chief government affairs officer at the American Retirement Association in Washington, “takes issue with any mandate that makes it more difficult to operate a plan,..

Further, the rule will lead to confusion among participants as to what the disclosures mean and what their given plan offers or doesn’t offer with respect to annuities”.

This despite the Department of Labor making it perfectly clear that employers are not on the hook

Plan fiduciaries that use the regulatory assumptions and the model language laid out in the rule will qualify for liability relief and will not be held responsible in the event participants are unable to purchase equivalent monthly payments, the Labor Department noted.

Here parallels are with the concerns in the UK that any scheme offering schemes pensions under the CDC regulations , may be deemed to be guaranteeing a defined benefit

Down in the swamp!

Terrified by the prospect of collectivism, the pensions lobby insists on making retirement planning the exclusive domain of the tech-savvy, well-educated , mass affluent. Again parallels with the UK are only too obvious.

The ERISA Industry Committee in Washington is “disappointed” by the interim final rule and has consistently opposed the “one-size-fits-all approach that uses government assumptions to calculate annuity-equivalents,” said Aliya Robinson, senior vice president of retirement and compensation policy. ERIC believes that using online calculators and modeling tools “will better meet the goal of increasing participant understanding of the importance of lifetime income needs instead of a rigid, limited calculation based solely in the form of an annuity payment that does not include the unique circumstances of each participant,” Ms. Robinson added.

Though not everyone in the US is opposed to this simple disclosure

A spokesman for TIAA-CREF said that this type of disclosure will encourage participants to be more engaged. “More information like this leads to increased financial knowledge, more strategic long-term financial planning, and ultimately to better financial outcomes and wellness overall.”