Automaker also shifting balance of pension plan to Prudential
June 1, 2012 3:38 pm ET
General Motors Co. on Friday announced plans to cut its pension obligation by $26 billion by offering lump-sum payments to about 42,000 white-collar retirees. The nation's largest automaker is also shifting the balance of its plan to Prudential Insurance Co. of America.
“These actions represent a major step toward our objective of derisking our pension plans and will further strengthen our balance sheet and give us more financial flexibility,” Dan Ammann, GM's chief financial officer, said in a statement. GM's pension buyout announcement follows a similar move by Ford Motor Co. that offered lump-sum payments to about 90,000 salaried retirees.
The GM announcement affects retirees who retired before Dec. 1. GM retirees don't have to accept the offer. Those who don't will continue to receive monthly pension payments through a new group annuity contract administered by Prudential. The annuity contract is expected to be completed by the end of this year.
“This landmark agreement allows GM to maintain the value of U.S. salaried pension benefits for its retirees while significantly reducing its pension obligations,” said Christine Marcks, president of Prudential Retirement. “With our financial strength, investment capabilities and actuarial expertise, Prudential is uniquely suited to assume the responsibility of guaranteeing pension benefits.”
Leon LaBrecque, founder of LJPR, a firm managing over $431 million in assets, noted that choosing between the two payment types can be nettlesome. “The lump-sum vs. monthly pension benefit decision is an exceedingly complex one with, tax, estate, mortality, investment, and many more consequences," he said. "Retirees should study their options carefully before making a decision."
The GM and Ford announcements may be just the tip of the iceberg. A new report, “The Future of Retirement and Employee Benefits,” issued by Prudential and CFO Research Services last month found that senior finance executives in a broad cross-section of industries increasingly are exploring solutions to reduce or eliminate the effect of pension-funding volatility. Many respondents indicated that funding their pension obligations constrains their firm's cash flow, access to capital and ability to invest in growth opportunities.
The 2012 survey found an increase in the percentage of companies likely to transfer pension plan risk to a third-party insurer. More than 40% of respondents said they are likely to do so within the next two years, up from 30% in the 2010 survey.