GE joins corporate brethren in trend to put DB plan in the rearview mirror

General Electric Co.'s recent announcement that it is freezing its U.S. defined benefit plan as a means of reducing its pension liabilities is just the latest example of corporations abandoning their DB plans and moving participants into a defined contribution plan.

As a means of reducing its pension deficit by $5 billion to $8 billion, GE said Oct. 7 it is freezing its U.S. pension plan for 20,000 salaried employees and supplementary pension benefits for another 700 employees who became executives before 2011. It is also offering a lump-sum payment to 100,000 former employees who have not yet started receiving their pension. GE did not disclose how much it is setting aside for potential lump-sum payments.

GE also plans to prefund $4 billion to $5 billion of its estimated minimum funding requirements for 2021 and 2022 out of the $38 billion it collected from selling its BioPharma and Baker Hughes businesses and selling off GE Transportation, which will merge with Wabtec Corp.

GE had a total of $50 billion in DB assets and $68.5 billion in liabilities as of Dec. 31, for a funded status of 73%, its highest since the end of 2013. It was the fifth largest corporate pension plan as of Sept. 30, 2018, according to Pensions & Investments data. Despite its funded status rising nearly 6 percentage points in 2018, the plan's funding ratio ranked 93rd out of the 100 largest U.S. corporate pension plans, according to P&I's analysis of 10-K filings.

A spokeswoman for GE said in an email that these actions are the logical continuation of steps taken in 2011 and 2012 when the company closed the DB plan to new hires and began providing a DC-only retirement plan.

With $26.7 billion in DC assets as of Sept. 30, 2018, GE's 401(k) plan is the 10th largest U.S. corporate DC plan, according to P&I data. GE contributed $430 million to its 401(k) plan in 2018, per its latest 10-K. GE will contribute 3% of employees' salaries to a 401(k) plan and also provide a 50% matching contribution for up to 8% of employee contributions. Employees will also receive a 2% pay increase for the next two years to help with the transition.

Kevin Cox, GE's chief human resources officer, said in a news release announcing the actions: "Returning GE to a position of strength has required us to make several difficult decisions, and today's decision to freeze the pension is no exception. We carefully weighed market trends and our strategic priority to improve our financial position with the impact to our employees. We are committed to helping our employees through this transition."

GE declined requests for an interview.

Analysts and industry experts agreed that it's the right thing for GE to be doing from a balance sheet perspective. "I'm amazed it's taken so long," said Brian K. Langenberg, principal and founder of analyst firm Langenberg & Co. LLC, Chicago. "Your stock is in the single digits, you were once one of the biggest players in the industry, what part of this is confusing?"

GE "is under some distress," which means "they have to sell assets," he said.

"If you can find a way to reduce your liability by several billion dollars, you do it," Mr. Langenberg said. "The move away from defined benefit toward defined contribution has been a 20-something-year trend."

Carol Levenson, director of research at Gimme Credit LLC, a New York-based corporate bond research firm, said in an email: "I'm glad GE is taking action to bolster its balance sheet and reduce its fixed obligations. But we don't really know the full financial implications yet, do we? Now it has to come up with an ongoing cash outlay today to make and match the 401(k) contributions instead of paying out pension benefits over time in the future, theoretically funded from plan assets."

"We view these actions as another incremental positive step in GE's path toward deleveraging its balance sheet … while also shrinking and derisking its pension obligations," wrote Deane M. Dray, a managing director and senior analyst at RBC Capital Markets LLC, Toronto, in a note to investors.

These moves are also consistent with the growing trend of corporations moving away from traditional DB plans to DC plans. Firms such as Caterpillar Inc., International Business Machines Inc., Lockheed Martin Corp. and Boeing Co. have all frozen their pension plans in the last decade or so.

Dave Suchsland, managing director at Willis Towers Watson PLC, Philadelphia, also said that what GE has done and how it's doing it has been "a consistent trend over the last 20 years."

Citing a study from Willis Towers Watson, Mr. Suchsland noted that in 1998, 59% of Fortune 500 companies offered a DB plan to new hires. In 2017, only 16% of those same employers provided one.

"With DC, there's lower risk on the balance sheet over time," Mr. Suchsland said.

He added that GE's path in moving to frozen plan from a closed one is similar to one many other organizations took. "An organization like GE will cause other companies that still have a DB plan to think about their DB plans and look at them again," Mr. Suchsland said.

The trend toward DC to reduce liabilities isn't just occurring in the U.S. "The same sort of thing happening in North America is happening here in the U.K.," said Chris DeMarco, managing director of U.K. pension risk transfer at Legal & General Group PLC in London. "Certainly, the fact that folks are living longer (means that) the cost of paying people a pension until the day they die has increased dramatically."

He also noted that falling interest rates have squeezed plan sponsors by increasing the cost of future pension obligations and diminishing returns on investments, which makes it more difficult to meet those obligations.

"What GE has done is dramatic because of the sheer size of the liabilities they have, but it's consistent with what corporations have been doing in the U.S. and U.K.," Mr. DeMarco added.

As for why it took so long, Ms. Levenson said she supposed it was "because it was always a part of the corporate culture to take care of its employees forever and thus a big cultural shift to change that implied promise to existing longtime employees. It's different when you hire people who know they won't get a pension."

"I was wondering why it didn't just terminate the plan and purchase annuities, as others have done," Ms. Levenson added.

In his note to investors, RBC's Mr. Dray said he believes "these pension actions should have been orchestrated much sooner and arguably by the previous CEOs."

Despite this, Mr. Dray wrote that he thinks this initiative led by CEO Larry Culp and Mr. Cox "had been sequenced according to the list of actions that the company has needed to methodically prioritize to meet its 2020 leverage target."

GE also needed to secure funding from its portfolio sales so that it could redeploy the proceeds on these debt and pension reduction actions.