GM retirees’ lump-sum dilemma

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General Motors’ pension obligation for retirees who left the company as nonunion salaried employees is being assumed by Prudential Insurance Co. I wrote about this recently. But it was unclear then that the change would mean these pensions would no longer be covered by the Pension Benefit Guarantee Corp., a government organization that guarantees the defined benefit pensions of U.S. workers living in retirement.

Retirees covered by the GM plan have a choice: They can take a lump sum that reflects the total amount of what they would have received from their current monthly plan for the expected duration of their own life and that of their spouse, or they can decide to continue to take their monthly pension — the same one they get now — but with no federal guarantee.

Buyers of annuities are protected by state guarantee funds. In the case of GM, retirees would be covered by the state guarantee fund in the state in which they live at the time the insurance company goes into receivership. In Michigan, where many of the retirees live and will continue to live, the Michigan Life & Health Insurance Guaranty Association would guarantee up to a maximum $250,000 of the annuity if Prudential were to fail.

Leon LaBrecque, an attorney and CPA who specializes in auto company pension plans, says if Prudential failed and no other company wanted to take over the policies, it would probably be a case of “catastrophic failure” — not only the failure of Prudential, but also the failure of other safety nets.

John Colpean, general counsel for the Michigan guarantee association, says insurance company failures do happen — one or two a year. But the big example that you might point to — American International Group, or AIG, which was bailed out by the federal government — was not a failure of its annuity-writing life insurance companies. It was a bad bet on subprime mortgages.

So what should you do if you are faced with having to make the choice between a pension guaranteed by Prudential and a lump sum you have to manage yourself? Do you trust yourself more than you trust an insurance company?

LaBrecque says he’s recommending that 60 percent of his GM retirement planning clients stick with the annuity and 40 percent take the lump. Most of those to whom he recommends the pension are people who are healthy and probably looking at a long life.

“If you are like one of my clients, a 57-year-old woman who looks 35 and who has a 95-year-old mother, you should definitely stick with the annuity because you are going to win,” LaBrecque says.