Fine Print in World Trade Pact Could Trim Pension Nest Eggs for Many : Retirement: Lump sum payments could be substantially reduced because of GATT’s assumptions about future interest rates. What’s more, contributions will be held down because of limits on cost-of-living adjustments.

DENVER — A little-noticed provision in the law implementing American participation in a world trade pact could significantly reduce the size of your pension nest egg.

The provision, part of the General Agreement on Tariffs and Trade, is intended to raise money to help offset losses in tariff revenues. According to Robert Pennington, an academic associate at the College for Financial Planning, a division of the nonprofit National Endowment for Financial Education, the provision could affect future retirees in one of two ways:

* Adjustments to the maximum amount that employees and employers can put into defined-contribution plans, such as 401(k)s, will rise more slowly than inflation.

* The size of cost-of-living adjustments and lump-sum distributions made to employees under traditional pension plans will be reduced.

The GATT legislation froze for at least a year the maximum contribution an employee may make to a 401(k) plan. That means that the 1995 maximum deferral limit will be the same as the 1994 limit--$9,240.

Furthermore, future cost-of-living adjustments based on inflation must rise at least $500 before the adjustments can go into effect. For example, the maximum contribution in 1995 would have risen to $9,496 without GATT, but that’s only a $256 increase over the 1994 contribution amount. Participants would have had to wait at least another year before the adjustment exceeded $500 and thus could have gone into effect, Pennington said.

He also noted that slower increases in maximum employee contributions mean slower increases in matching employer contributions. The result will be a smaller retirement nest egg.

Company contributions to traditional pension plans also will be frozen for 1995, and contributions will rise more slowly after that. But the more dramatic impact of the GATT legislation is the way lump-sum distributions now must be calculated.

Under traditional pension plans, employees typically receive company-paid benefits based on salary and length of service. Usually, these benefits come in the form of monthly annuity payments, but roughly one-third of the plans allow employees the option of taking a lump sum payment.

“Many retirees elect to transfer their pension plan money into an individual retirement account,” said Pennington. “But tucked away in the fine print of the GATT legislation is a requirement that may affect that decision.”

The fine print concerns the interest rate assumption of the payment. The size of a lump sum payment is based on what the lump sum needs to earn at a certain interest rate over the lifetime of the retiree, so that the payment and total earnings equal what the retiree would have received in lifetime annuity payments.

GATT legislation requires the interest rate to be set according to the current interest rate of 30-year Treasury bonds. But the current interest rate, slightly below 8%, is well above the rate many plans now use. A higher interest rate means a smaller lump-sum payout since it assumes the sum will earn the higher rate over the lifetime of the retiree.

Pennington gives the example of a 65-year-old employee choosing between a single-life annuity providing $30,000 a year or a lump sum payment. Before GATT, the employee would have received a maximum lump sum payment of $376,918, assuming a 5% interest rate. But under the higher 30-year Treasury bond rate imposed by GATT (7.94% in October, 1994), the lump sum distribution would be only $297,154, a 21% decrease.

The impact of this higher interest rate will be somewhat offset by the required use of a special mortality table that assumes a longer retiree life span than assumed by tables currently used by many pension plans. That means a larger lump sum payment.

Will the GATT legislation affect you? If you’re making maximum contributions to a 401(k) plan, the answer is yes. If you participate in a pension plan and are nearing retirement, Pennington recommends that you:

* Take a hard look at the annuity options offered by the plan, including joint-and-survivor and single-life. With the potentially smaller lump sum payouts, the annuity options may be more attractive than they were before.

* Find out how soon the pension plan is going to implement the new rules. Employers have up to five years to put them into effect.

* Compare the plan’s current interest rate assumption with the GATT rate. Some plans use interest rates that already are close to the 30-year Treasury rate.

* Find out what mortality table the plan uses. A table that assumes a shorter life expectancy than the new table means your lump sum will be larger under GATT--though not necessarily large enough to offset the higher interest rate assumption.

Pennington emphasized that the GATT legislation does not affect retirees who have already elected a lump sum distribution or who are receiving annuity payments.