47,500 employees would take their separation offering, a full one third of their total workforce. Of that group, more than 30,000 are choosing the early retirement package. GM has indicated that they will be offering lump sums of between $70,000 and $140,000 to these rank and file members. It will then be up to each individual retiree to manage this pension money to support them along with the rest of their assets well into old age. Responsibility for the future has now shifted terminally to each individual employee. Will they be able to see their way forward with clarity and receive the objective financial advice they will need to preserve this capital? Who would have thought that this would be the way that they end their working careers?

It is not known when modern pension structures came into being. What is terribly clear is that in the good old days (sometime after cave dwellers became more domesticated) not only were there no pensions, but not much of any contingency planning. A small farm accident could cost an entire generations of families their livelihood and their home, whereby they would be consigned to the 'poor' house to live out their days. Small 'pensions' then were doled out to pay for their care, but in reading between the lines in various accounts of that time in history, most of that dole went to the caregiver, not to the indigent person as a hand up. There is still a self-righteous stigma attached to being poor.

Modern (and ancient) democratic societies established governments, whose role is to create laws, oversee rules and act in the common good, particularly for those who due to dire circumstances beyond their control, take care of themselves. A small indigent child (or elderly parent) with no surviving relatives has no resources, hence, expressions such as 'ward of the state.' Governments created minimal old age, widow, and disability pensions to serve that purpose, funding these amounts through taxation laws borne by society in general,

Wickpedia states that: A pension is a steady income given to a person (usually after retirement) and is typically payments distributed in the form of a guaranteed annuity to a retired or disabled employee. Some retirement plan (or superannuation) designs accumulate a cash balance (through a variety of mechanisms) that a retiree can draw upon at retirement, rather than promising annuity payments. The first mechanism in the form of an annuity stream is generally the structure of a defined benefit plan. The second, where cash or investments are accumulated is a minimal form of a defined contribution plan. In either case, a pension created by an employer for the benefit of an employee is commonly referred to as an occupational or employer pension.

Occupational pensions are a form of deferred compensation, usually advantageous to employee and employer for many reasons: tax treaty countries, access to diversification, and professional money mangers, expense deductions, promotional benefits to attract high calibre employees, and perception as socially responsible corporate culture. Pensions may also contain an insurance aspect, since they often will pay benefits to survivors or disabled beneficiaries, while annuity income insures against the risk of longevity.

There is a distinct difference between a defined benefit plan (DFP) and a defined contribution plan (DC) and it can be boiled down to one word. With defined benefit plans the ultimate distribution is laid squarely on the corporate shoulders of the employer. Defined contribution (DC) plans are accumulations of investments in one form or another that are generally contributed to over time by the employee and the employer. The accumulation (and investment choices) in a DC is the ultimate responsibility of the employee. The benefit in a defined benefit pension plan is determined by a formula, which can incorporate the employee's pay, years of employment, age at retirement, and other factors. It is contingent upon the employee performance, longevity with the employer, performance of the investments managed by the company, whether the defined benefit plan is fully funded each year and probably most important, the long-term corporate and economic health of the company itself.

A simple example is a flat dollar plan design that provides $100 per month for every year an employee works for a company. For 30 years of employment, that participant would receive $3,000 per month payable for their lifetime. Typical plan payouts are often calculated by the average salary over the last three or five years of an employees' career. The DFP structure benefited the older loyal long-term employee (as you can well imagine), but increasingly, corporations have switched out of these arrangements (with and without the employees' consent), citing reasons such as too expensive, too many unfunded liabilities, and so on.

What is interesting to me, though, is that major corporations have had no problem using gains from employee defined benefit pension plans to enhance their overall bottom line, thus boosting share prices. Yet when the time comes for the individual employee to collect on their retirement, the answer is often a different story.definition of a defined contribution (DC) plan is:

?The plan provides for an individual account for each participant;

?for benefits based solely on the amount contributed to the account, plus or minus income, gains, expenses and losses allocated to the account;

?plan contributions are paid into an individual account for each member;

?the contributions are invested, for example in the stock market, and the returns on the investment (which may be positive or negative) are credited to the individual's account.

On retirement, the member's account is used to provide retirement benefits, often through the purchase of an annuity or an investment account/annuity combination which provides a regular income. Defined contribution plans have become more widespread all over the world in recent years, and are now the dominant form of plan in the private sector in many countries. The number of defined benefit plans in the US has been steadily declining, as more and more employers see the large pension contributions as a large expense that they can avoid by disbanding the plan and instead offering a defined contribution plan.

Next week we will discuss the specifics of individual pension plans in Bermuda.

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