General Motors Co. will change the way it makes pension payments to white-collar retirees, shoring up its finances by offering buyouts and shifting liabilities to an annuity.
The moves will unload $26 billion in pension liabilities from the Detroit automaker's books, and experts say the changes are likely the start of a trend as companies with defined benefit pension plans try to cut risk and administrative costs.
GM said Friday that it will offer 42,000 retirees a lump-sum of cash if they agree to stop taking monthly benefits. For the rest of the 118,000 U.S. salaried retirees and spouses, GM will buy a group annuity that will make monthly payments starting in 2013.
The Prudential Insurance Co. will handle the annuity and pay the benefits. The amounts of the monthly pension payments will not change. GM's current salaried workers also will get the same benefits they would have received before the move.
The moves will cut GM's total U.S. salaried pension obligation from $36 billion to around $10 billion.
GM will look for more ways to cut its pension obligations, said Chief Financial Officer Dan Ammann. He wouldn't say whether similar moves are in the works for the much larger blue-collar pension plan. GM now pays pensions to a whopping 400,000 blue-collar retirees and their spouses.
Its U.S. hourly pension plan has about $71 billion, about $10 billion short of its obligations.
To pay for the annuity for salaried workers, GM will pump about $4 billion in cash into the pension plan and then pay $29 billion to Prudential. The shift benefits GM by eliminating the possibility that the company could have to spend more and more to cover the same pensions.
GM follows crosstown rival Ford Motor Co. in taking steps to unload pension obligations. In April, Ford offered lump-sum buyouts to 90,000 current retirees and former employees. Pension experts say the automakers' actions likely are the start of a major shift in the how companies handle pension plans as they try to cut financial risk and the administrative burden of paying pension benefits.
"Lump sum offers for retirees and annuity purchases of this magnitude are groundbreaking events in the evolution of risk management strategies," said Carl Hess, global head of investment services for the benefits consulting firm Towers Watson. "Major market shifts are often driven by the actions of the largest corporate plan sponsors."
Even though the deal now will cost GM about $3 billion more than it will save over the lives of the retirees, based on current numbers, Ammann said the change helps the company by avoiding long-term risk.
Investors at first embraced the change, driving up GM's stock by 3 percent shortly after the announcement. But the shares quickly fell back with the broader market to close down 1 percent at $21.99.
Fitch Ratings said in a note to investors that the moves are positive for GM, but the firm kept GM's credit rating at a notch below investment grade.
GM's huge pension burden has been one of several factors holding down its stock price.
Ammann said GM has had to contribute $7 billion to its salaried pension plans since 1999. Generally, companies have to sink cash into their pensions when investments don't generate enough returns to cover growing obligations.
"We will be less exposed to the funding volatility and calls on cash we've been exposed to in the past," Ammann said.
Across the globe at the end of last year, GM had pension obligations of $107 billion but only $94 billion available to pay them, a $13 billion shortfall.
The company expects to take a $2.5 billion to $3.5 billion charge in the second half of this year as it pays for the annuity. It also expects annual earnings to drop by $200 million because pension income will drop.
The company has had discussions with the United Auto Workers union about pensions, but Ammann wouldn't give specifics.