When General Electric Co. froze its defined benefit pension plan earlier this month, a quiet pioneer bit the dust.
GE's pension fund was a pioneer investor in many of the investment strategies of the past 60 years, though the GE pension staff rarely talked about them. They practiced broad diversification before Harry Markowitz's paper on the value of diversification became widely known.
GE's pension assets were mostly managed internally, and the pension fund was an early investor in real estate, buying offices buildings, warehouses and some manufacturing facilities beginning in 1960. Most corporate and public employee pension funds discovered real estate investing in the late 1970s after the Department of Labor clarified that it was an acceptable asset.
The GE staff also in the 1960s invested the fund's assets in select international stocks, becoming, along with the U.S. Steel and Carnegie Pension Fund, the earliest pioneers in that asset class. Again, this was before ERISA and Department of Labor oversight.
But even after ERISA's passage, GE's pension team continued to break new ground, making the fund one of the first to invest in oil and gas when it helped pioneer the development of the Williston and Anadarko oil and gas basins in the late 1970s. Also in 1983, the fund was one of the first investors with Kohlberg, Kravis and Roberts' leveraged buyout program.
Despite all this pioneering and an apparently successful long-term investment program, GE found the defined benefit plan too heavy a burden to maintain, especially given the debt the company is carrying.
GE faces stiff international competition in many of its businesses and is trying to strengthen its balance sheet and cut costs, so cutting the long-term pension obligations makes sense.
Defined benefit plans have become more expensive than most companies expected when they established them. Interest rates have plunged, pushing up the present value of the liabilities, while life expectancies continue to rise, punishing the fund with both interest rate risk and longevity risk.
GE joins the ranks of other large industrial companies that have frozen or terminated their defined benefit pension plans and replaced them with defined contribution plans, including Caterpillar Inc., Lockheed Martin Corp. and Boeing Co.
In freezing its plan GE is not a pioneer, but its departure from the defined benefit plan arena still might encourage other DB plan sponsors to consider more seriously whether their plans still make sense or should be replaced by defined contribution plans.
