This does leave a lot of dangling questions and/or issues to be dealt with (more like live with, I guess). The guarantees for annuities are defined by the states (?? and are typically $250K max payment (per company) as some kind of discounted present value calculation. That is not going to cover many pensions for those with remaining lifetimes of 20 to however many years. That is kind of disturbing. I suppose one could buy a permanent ladder of Metlife and Prudential Put Options as a hedge here (I am only half joking).?
And I cannot tell if they would continue annual payments until you have hit your max or if this is a lump sum (kind of a tax catastrophe for most of us I would think). Also from what I can glean there is no reserve fund like the PBGC (which charges annual premiums). This appears to be a pay as you go thing where when a given company cannot pay its annuity liabilities, that cost (up to the max) is shared by the remaining members. If there is some kind of major financial disaster on the scale required to put a Prudential under, they would probably be the last to go and those annuitants would probably not see anything (no one left standing to pay). Strictly from the perspective of some unprecedented global financial disaster, you are probably better off with the weakest company (not the same as better off overall, of course). The weakest would go first while there are others still standing left to pay. I know - I tend to be morbid sometimes.?
I am assuming that there are some level of regulations regarding required reserves to cover annuity liabilities but given that this seems to happen at the state level (where surely Prudential/Metlife is not dealing with 50 separate reserve funds) I am not sure how this happens or what those standards might be. From what I have seen out in the industry (particularly WRT union pensions) the standards seem to be poorly enforced. I just have no clue how this works in the annuity world (same as life insurance reserves, I assume).?
Regarding IBM assumptions and investments WRT DB pensions, back in the very early 2000's I stumbled across the assumption that IBM was making at the time when it calculated the ability of the Fund to pay pensions. It was something like 9% per year. This would not pass 2 minutes of scrutiny if they were doing a predominantly bonds kind of investing. I don't see why an insurance company would have a different equation for investing those funds vs. IBM as it was basically profit in both cases (one shows directly on the bottom line while the other is a cost avoidance). And I have to believe that there are some level of legal requirements here.?
dave
