Last month, we reported on Ford's decision to offer a pension plan buyout to some 90,000 employees and retirees. Now, General Motors has followed suit by announcing that it will be offering salaried retirees and surviving beneficiaries with either a lump-sum payment or a monthly annuity payment provided through an insurance company. GM's offer is designed to reduce the company's pension plan liability by $26 billion.
Coming on the heels of the Ford decision, GM's action is significant for a number of reasons. First, it offers other plan sponsors a roadmap for reducing pension plan liabilities. While Ford offered only lump sums, GM is transferring some of its pension liabilities to a third party by offering an annuity option through Prudential to some retirees and simply shifting other retirees to a Prudential annuity to continue their current monthly benefits.
Second, "this approach answers the question of whether the insurance market has the capacity to take on very large pension liabilities," says Sean Brennan, a principal with Mercer in New York. "The answer from the Prudential/GM deal is yes, and that will open the door to other plan sponsors considering this option."
In addition, Brennan notes that the analysts covering GM have been neutral on this deal's impact of GM's share price. "A lot of plan sponsors have been reluctant to do a deal like this because of the potential implications for accounting results and earnings," says Brennan. "GM's action and the market's response has allayed those fears to some extent."
Why are pension plan sponsors so keen to offload their pension liabilities? In GM's case, the decision is designed to make the company more attractive to investors, credit rating agencies and other parties. For many other companies with closed or frozen pension plans, having lingering pension liabilities and risks is not a recipe for positive growth. This is particularly true when pension plan liabilities are quite large, not just in dollar amounts but relative to the size of the company.
"Pension risk, particularly where the pension is no longer a part of the conversation, is seen as something that is not core to their business and, as such, very few plan sponsors have an appetite for maintaining that risk," says Brennan. As a result, many of these plan sponsors are looking for ways to reduce that risk even if they are not in a position to terminate the pension plan because of the costs involved.
That is why the Ford and GM actions are so significant. "We are going to see increased interest in this approach, especially among plan sponsors who have frozen pension plans," predicts Brennan. "Even plans that do not have the funded status today to seriously consider plan termination or an annuity purchase will make this a target over the next five or 10 years as a solution to pension risk."