General Motors Co., Detroit, on Friday announced it would offer a lump-sum payment to 42,000 retirees in its U.S. salaried pension plan and also will purchase a group annuity contract with Prudential Insurance under which Prudential will pay and administer future benefit payments to another 76,000 U.S. salaried retirees.
Any of the 42,000 retirees who reject the lump-sum payment would be included in the annuity.
As a result of the changes, GM will terminate its current salaried pension plan and replace it with a new plan for active U.S. salaried employees and those who retired after Dec. 1 with the same provisions as the terminated plan. At retirement, these participants can get a lump-sum payment or monthly pension benefit, payable by GM.
The moves will reduce GM's expected pension obligations by $26 billion, regardless of the number of retirees that accept lump-sum payments, said Preston Crabill, director, GM strategic benefit planning, in a conference call. The U.S. salaried DB plan has $33 billion in assets and is 92% funded. All of GM's DB plans had a total of $94.3 billion in assets as of Dec. 31.
This is “absolutely a landmark case in this space,” said Mick Moloney, senior partner in America's insurance practice at consultant Oliver Wyman, which along with Mercer advised on the GM-Prudential transaction. “We've been saying for quite a while that we expect one of these large transactions to happen and set a precedent.”
Mr. Moloney said GM becomes the largest U.S. plan “by a big multiplier” to annuitize liabilities and expects a “pipeline of very big deals to come.” He added there has been great interest in taking this path by large companies, but the concern existed about how the markets would react.
“Our hope and expectations are that this will be perceived positively by the market,” Mr. Moloney said.
GM's announcement comes just more than a month after Ford Motor Co., Dearborn, Mich., announced it would offer lump-sum payments to 90,000 U.S. salaried retirees and former employees, but GM will make its offer first as retirees have until July 20 to choose between the payout and annuity options. Ford is expected to begin offering its lump-sum option in August.
GM's anticipated cash contribution to its U.S. salaried pension plans will be in the range of $3.5 billion to $4.5 billion to help fund the purchase of the group annuity contract and to improve the funded status of the pension plan for active salaried employees, according to a news release from the automaker.