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Post-election pension blues

US pension fund industry players are bracing for the new Democratic Congress. Their lobbyists and attorneys had hoped to obtain some industry-friendly amendments to the new Pension Protection Act, signed last August by President George W Bush. But with the new Democratic majority in both the House and the Senate those ambitions must be put aside.

Now insurance and mutual fund managers see the gridlock in Washington - the political impasse between the Republican White House and the Democratic Congress - as the best scenario. Any change according the Democratic plan, as described by the new house leader Nancy Pelosi, could damage the private pension industry, trying and introducing measures to make defined contribution (DC) plans more like defined benefit (DB) ones, in other words, reversing the trend that has been going on during the last 20 years. Democrats do not like this trend, which has shifted the burden of choice and risk about retirement savings away from employers and onto employees' shoulders. Democrats' largest supporters, the unions, will raise the profile of pension and bankruptcy law reform.

"We hope that a Democratic-controlled Congress would be more interested in protecting US workers' retirement savings than in creating opportunities for the mutual fund industry to exploit them," declared Damon Silvers, associate general counsel for the AFL-CIO. Just after the official Democratic victory, union leader James P Hoffa promptly wrote an opinion piece in The Detroit News, asking for more "retirement security".

Hoffa said: "The pension crisis has been brewing for decades, yet Congress has led us along the primrose path, agreeing to corporate lobbyists' demands rather than securing their constituents' well-being. When it came time to close loopholes in the pension system or fix the fuzzy maths in accounting rules, Congress chose to destroy consumer bankruptcy protections while leaving corporations free to bail themselves out." Hoffa demanded a "bipartisan legislation that would enable more workers to build their unions free of coercion" and fight for better pay, benefits and working conditions.

‘Better pay' means increasing the minimum wage, an item included in Pelosi's ‘100 Hour' agenda for the 110th Congress, opening in January 2007. ‘Better benefits' means defending DB plans and making it difficult for companies to cut them. Pelosi's longer-term agenda aims to: "Reform bankruptcy and pension laws to prevent companies from unfairly dumping pension plans; make certain that employees receive the benefits they have been promised after a lifetime of hard work, and protect long-serving, older employees when a company moves from a traditional pension to a cash-balance plan."

Two fields where Democratic activism could affect the pension industry even during the next two years are retirement incomes and financial advice. In both cases 401(k) plans - DC individual retirement accounts - are involved. A proposal would encourage employers to give retiring workers the option of converting their nest eggs into a stream of income in order to reduce the risk that they will run out of money as they get older: for example, to provide a tax incentive to offset the costs employers would bear if they offer workers the option of an annuity with a monthly cheque for life. This way, a 401(k) plan would look more like a DB plan, but it will still depend on employees' investment choices and their returns.

The new PPA allows 401(k) fund managers to also provide advice, an invitation to new conflicts of interest according to Democratic critics. But the industry players were not completely satisfied even with that freedom and wanted to get rid of the ‘fee-levelling' requirement that imposes a single flat fee for the advice. Not only will Democrats oppose any attempt to make advice fees ‘flexible', they will also try and introduce new limits to avoid conflicts of interest.

Leading the two Senate committees that deal with social security and pension funds are likely to be Montana senator Max Baucus for the finance committee, and Massachusetts senator Edward Kennedy for the health, education, labour, and pensions committee. The latter is a liberal icon, Baucus loudly criticised Bush's plan to add private accounts to social security in early 2005.

Bush has not abandoned that. On the contrary, just after losing the Congress, Bush said it was important for Republicans and Democrats to come together to shore up the long-term finances of entitlement programmes such as social security. Pelosi herself has vowed bipartisanship.

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