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On August 3, 2006, by a vote of 93 to 5, the US Senate passed the “Pension Protection Act of 2006″, already approved by the House of Representatives on July 28, 2006 and now going to President Bush to be signed into law.
Aging populations alter capital flows
This massive bill (907 pages) is a major piece of legislation that, like ERISA in the 1970s, will effect capital flows in the US market over the next generation.
Links to the full text of this law and related discussions can be found on BenefitsBlog.
A boon for Wall Street?
The Wall Street Journal has already headlined some of the expected effects on capital flows.
In the lead editorial on August 4, 2006, “The Pension Era, R.I.P.”, the Journal announced that this law “signals the end of the old, defined-benefit pension era.”
In an article on August 7, 2006, the WSJ announced, “Pension Bill Promises Windfall for Fund Firms“, citing research by the Vanguard Group projecting an additional 5.5 million new savers in 401(k) plans.
The article also states that passage of the bill was helped along by heavy lobbying by the mutual fund industry trade organization, the Investment Company Institute.
The Act allows, but does not require, automatic enrollment in 401(k) plans and permits employers to give “investment advice” to plan participants.
The law of unintended consequences
History suggests that a law as complex as the Pension Protection Act of 2006 is likely to be laced with obscure provisions that will have unintended consequences.
Therefore, although fund managers are celebrating today, it may be too soon to guess at the long-term impact of this trumpeted “pension reform” on the US capital market.
For example, one of the unexpected consequences of ERISA was to encourage fund managers to vote the proxies on stock held in portfolio and develop codes of “corporate governance”.
This led to a joining of interests between fund managers and professional executive-employees, spawning the trillion-dollar buyback-option movement that has forced stock prices upwards over the last generation.
In 1974, however, the “corporate governance” requirement was generally not seen as a major provision of ERISA.
The results were definitely not foreseen.
The other unintended consequence of ERISA was to stick a dagger into the heart of defined-benefit retirement plans, which now will be finally dispatched (over the next generation) by the “Pension Protection Act of 2006″.
In the next two years, as the market begins to digest the Pension Protection Act of 2006, we should begin to better understand what effects this law will have on capital flows.
For better or worse, it is likely that the consequences will be significant.
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