On June 1, General Motors Co. (GM) announced a program that will eliminate approximately $26 billion in pension liabilities for salaried retirees and beneficiaries by the end of 2012. This reduction in GM’s pension obligation will be accomplished through a combination of (1) offering lump sums to 42,000 of its 118,000 salaried retirees and beneficiaries impacted by the program, and (2) purchasing annuities from The Prudential Insurance Company of America for those retirees and beneficiaries who did not receive a lump sum payment.
The size of the transaction alone makes it unique within corporate America and the pension industry. In the United States, the entire volume of pension liabilities annuitized in recent years has not exceeded $1 billion per year, and no single annuity transaction has exceeded $1 billion since the 1980s. By contrast, GM is expected to annuitize a significant portion of the $26 billion in this single transaction.
"Since 2008, employers have been much more focused on pension risk management," remarked Byron Beebe, U. S. Retirement Consulting Market Leader for Aon Hewitt. "Many plan sponsors have been diligently improving the funded status of their pension programs. Those who now maintain well-funded pension plans are able to take advantage of opportunities which allow them to transfer risk away from company balance sheets. We expect a continuation of pension settlement and de-risking activities like those recently announced by Ford and GM."
GM’s Transaction is a Game Changer
The magnitude of GM’s lump sum offering is approached only by Ford Motor Company’s announcement of a lump sum offer to retirees and deferred vested participants last month; however, the time horizon over which GM expects to execute the lump sum offering is unparalleled. The 42,000 retirees eligible for a lump sum distribution have until July 20, 2012 to make their future payment decisions—whether to select a lump sum payment of their pension benefit, or continue to receive annuity payments from Prudential. By the end of the summer, the stage will be set for billions of dollars of plan assets to be liquidated and lump sums paid to electing participants.
As part of its plans, GM will create a new plan for active salaried employees. Following the creation of that plan, GM will complete a voluntary plan termination of the remaining retirees and beneficiaries. As noted above, Prudential has been selected to underwrite the annuities for those retirees not receiving the lump sum payment, and the transactions are expected to be completed by the end of 2012. The time line for completing the annuity purchase transaction is also much shorter than we have historically seen for such a large transaction (typically 12–18 months).
GM, in its press release, acknowledged the need for $3.5 to $4.5 billion in additional cash funding “to help fund the purchase of the group annuity contract and to improve the funded status of the pension plan for active salaried employees.” Further it disclosed special charges of $2.5 to $3.5 billion associated with the program, presumably for pension settlement accounting. An unfavorable impact to annual ongoing earnings of $200 million due to a decrease in pension income was also mentioned.
Rick Jones, Aon Hewitt’s leader of Retirement Consulting National Practices, noted, "These are significant transactions, and there are many and complex issues to consider, including plan finances, compliance, administration, communication, and individual participant decisions and associated counseling. At the same time, GM, Ford and other plan sponsors will also retain significant pension programs and liabilities, and comprehensive and effective ongoing management of those programs will continue to be critical in overall plan and financial management."
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