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Last month, Bristol Myers announced that it was jumping aboard the pension plan annuity conversion bandwagon. Instead of continuing to manage retirement obligations for its eligible employees, Bristol decided to contract with Prudential to convert its pension plan to a set of annuity contracts.

As a result, Bristol’s retirees will receive the same benefit payments during their retirement years. However, Prudential will distribute the funds in the form of annuity payments, in place of plan distributions from Bristol’s pension entity.

Two years ago, when General Motors (GM) pioneered the arrangement with Prudential, it was not yet clear whether its conversion would prove to be a unique event or a harbinger of a trend. Now that VerizonMotorola, and Bristol have followed suit, it would indeed appear to be a trend.

So who wins, and who loses, as a result of such a transaction? One could argue that every one wins. The corporation releases itself from an extremely large and unpredictable future liability, the beneficiary (i.e. the employee) gains the security of reliance on a global insurance company for professional fund management activities, and the insurer itself wins new business.

On the other hand, though, one could argue that every one loses. In the GM transaction, for instance, Prudential forced the firm to pay $29 billion to cover its $26 billion pension liability. In other words, GM effectively agreed to pay a multi-billion dollar fee to offload its liability to Prudential.

And though GM’s employees were promised that their retirement benefits would not change, they were forced to accept a private insurer’s annuity guarantee in place of a federally insured, ERISA regulated pension guarantee. As the former annuity beneficiaries of Executive Life and Mutual Benefit Life can attest, such private guarantees may offer far less protection than pension guarantees.

Even Prudential itself might not necessarily “win” in the long run by securing such new business. After all, by assuming the risk of managing benefits for pre-existing groups of beneficiaries, the insurer forfeits any opportunities to perform risk assessment pre-screening activities on its new beneficiaries. And Prudential itself possesses a somewhat spotty track record of utilizing derivatives to manage its annuity risk.

So, on the whole, is the annuity conversion trend a positive development or a negative development? It’s obviously difficult to offer a definitive answer to that question. It certainly appears that one can develop a convincing argument in favor of either position.

One cannot help but wonder, though, whether employees and retirees would benefit the most from simple self-managed IRA arrangements. Given the recent track records of insurers (like Prudential) and employers (like GM), who could argue with any employee who prefers to fully control her own retirement assets? And who wishes to select her own advisors and asset managers?

Some may argue that such an approach places all of the annuity risk on the shoulders of the employee. But in an era when financially strapped organizations can unilaterally slash pension benefits, and when insurance companies line up for federal bailouts, isn’t that where the risk ultimately falls?

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