GM and Ford Offer Retirees Lump-sum Pension Payments
Auto company retirees have important investment decisions to make as they consider special pension buy-out programs being offered by both General Motors (“GM”) and Ford Motor Company (“Ford”). While the unprecedented lump-sum buy-out offers will assist the auto makers in what Ford describes as a “long-term strategy to de-risk its global funded pension plans,” the action will transfer the risk of managing pension funds from these Fortune 10 employers into the hands of the pensioners themselves.
The General Motors Pension Plan
GM plans to eliminate traditional pension plans for all current salaried employees by the end of 2012, according to the Wall Street Journal.
The giant auto maker is taking two unusual steps to bring down pension costs. First, GM is offering lump-sum cash payments to 42,000 eligible salaried retirees who receive monthly pension checks. Not all salaried retirees are eligible for the lump-sum offer.
Second, GM is outsourcing pension administration for an additional 76,000 U.S. salaried retirees. Prudential Financial Inc. will administer the new GM pension program, which is being funded through a group annuity contract. Pension payments to these GM retirees, which are not expected to change in terms of monthly benefits, will begin in 2013 under the new plan. Unlike the lump-sum buyout, annuitizing the plan through Prudential does not require approval from the individual plan participants.
GM is expected to pay between $3.5 and $4.5 billion as a cash contribution to its U.S. salaried pension plans in order to purchase the annuity and increase pension plan funding levels. This action does not impact GM’s obligations for other benefits, including retiree health care, life insurance and vehicle discounts.
The Ford Plan
Ford is offering 90,000 U.S. salaried retirees and U.S. salaried former employees the opportunity to voluntarily accept a lump-sum payment of their pension assets. Ford will essentially settle their pension obligations to those retirees who choose to accept the offer. Payouts, which will begin later this year, will be paid from existing pension fund assets. This offer is similar to the lump-sum pension payout option available to U.S. salaried future retirees as of July 1, 2012.
The Retiree Dilemma
Fitch Ratings, according to a June 2012 press release, expects that “companies with both significant pension obligations and considerable cash might consider adopting a fresh strategy as a way to reduce their exposure to plan volatility. Massive pension liabilities have been constraining large companies for years … and remain a major concern for investors.”
As public and private employers take steps to limit their exposure to pension liabilities, more responsibility for retirement planning is being shifted to the individual retiree. Economic pressures in today’s uncertain job environment may force some retirees to redirect large cash pension payouts to the demands of daily living, even at a cost of early withdrawal penalties.
Retiree medical benefits remain a major area of risk for private and public retirees also. Unlike pension obligations, which carry specific advance funding requirements, retiree health care benefits are funded on a pay-as-you-go system and do not automatically vest. In too many cases, the well-intended promises of retiree medical care have no financial backing. Employers are decreasing retiree medical subsidies as well as expanding cost management efforts, according to a 2011 Aon Hewitt survey of 500 employers.
The GM and Ford moves are significant due to the auto makers’ role as leading U.S. employers, as well as the magnitude of their efforts to transfer pension risks off their balance sheets. GM plans to settle up to $26 billion in pension obligations, with Ford following at up to $18 billion.
While Chrysler has not announced similar plans, watch for other large plan sponsors to play follow-the-leader. State and municipal governments may take notice as well, since they are grappling with a $1 trillion pension funding gap.
Will ERISA litigation result from these unprecedented pension plan changes? Only time will tell.
Mark Johnson, Ph.D., J.D., is a highly experienced ERISA expert. As a former ERISA Plan Managing Director and plan fiduciary for a Fortune 500 company, Dr. Johnson has practical knowledge of plan documents as well as an in-depth understanding of ERISA obligations. He works as an expert consultant and witness on 401(k), ESOP and pension fiduciary liability; retiree medical benefit coverage; third party administrator disputes; individual benefit claims; pension benefits in bankruptcy; long term disability benefits; and cash conversion balances.
June 15, 2012
Copyright ERISA Benefits Consulting, Inc.
Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer.For specific technical or legal advice on the information provided and related topics, please contact the author.