GM pensions: What's next? Lump sum offerings to hourly retirees most likely on agenda, analyst says

Published: Monday, June 04, 2012, 7:55 AM Updated: Monday, June 04, 2012, 10:15 AM, Michigan Live

By Michael Wayland | mwayland@mlive.com

DETROIT, MI- General Motors Co. is not done looking for ways to reduce its pension obligations.

While announcing it will offer 42,000 of its 118,000 U.S. white-collar retirees a lump-sum of cash if they agree to stop taking monthly benefits, GM will continue to look at ways of reducing its balance sheet, according to company officials.

“Today’s actions represent another step, however additional opportunities remain," said GM Chief Financial Officer Dan Ammann during a conference call Friday with analysts and reporters. 

“It sets the … groundwork for further potential actions as we work to bring our pension obligations in line to a more normalized size relative to the size of our business and market cap,” he said.

That "groundwork" could be paving the way for GM to take the lump-sum offering to its hourly United Auto Workers retirees, according to Dean Thurman, co-founder and senior partner of InvestWise Financial LLC.

“If the math works for salary, the math works for hourly also,” he told MLive.com. “In addition to that, of course, if the math works for Ford and GM, it also works for Chrysler. They can’t be far behind.”

GM’s U.S. hourly pension plan has about $71 billion, which is about $10 billion short of its obligations. GM pays pensions to 400,000 blue-collar retirees and their spouses.

Ammann would not directly say what the Detroit-based automaker’s future plans are for lowering pension obligations, but said they were “a significant topic of discussion” during last year’s contract negotiations with the union.

“We have generally agreed with the UAW that we will maintain a dialogue on pensions going forward and continue to look at de-risking alternatives, but anything that we discuss with them on that remains private between us and them,” he said.

The current four-year contract between the UAW and GM will expire in 2015. 

For the rest of its U.S. salaried retirees and spouses that aren’t being offered lump sum payments, GM will buy a group annuity that will make monthly payments starting in 2013. The lump sum payments will differ for each employee.

The Prudential Insurance Co. will handle the annuity and pay the benefits. The amounts of the monthly pension payments will not change. 

The announced moves are expected to cut GM's total U.S. salaried pension obligation from $36 billion to around $10 billion. GM will pay about $4 billion in cash into the pension plan and then pay $29 billion to Prudential, according to officials.

Salaried retirees eligible for the lump-sum payment will have until July 20, 2012 to make a decision on their payment options.

The lump-sum offer for GM emulates an announcement made by Ford Motor Co. in April. Ford announced it would offer lump sum payments to about 90,000 U.S. white-collar retirees and former employees.

Ford’s numbers were larger because GM is only offering the lump sum to employees who retired from GM between Oct. 1, 1997 and Dec. 1, 2011.

“Both Ford and GM have turned this huge balance sheet beast into a kitten and Wall Street really loves it,” Thurman said.

GM, according to Thurman, most likely made that decision to limit the offering because it figures the older retirees are in their later stages of life and therefore may take a big lump sum and then pass away, which would leave the money to their families.

“The main reason people take the lump sum is because they rather have their children be beneficiaries of unused pension money instead of GM being the beneficiary,” Thurman said.

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.

Thurman, whose Bloomfield Hills-based company’s clients are 80 percent employees or retirees of the Detroit Three, said former employees should thoroughly analyze their decision regarding lump sum payments instead of pension plans.

If employees decide to continue their traditional pension plans, they risk the company going bankrupt. Also, if the individual unexpectedly dies, the company becomes the beneficiary instead of his/her family.

If an individual takes the lump-sum, they no longer have guaranteed money and have the responsibility of managing that money.

Thurman said the majority of employees that take the lump sum payments should roll it into an IRA (Individual Retirement Account) so the money is not taxable until they decide to use it.

InvestWise Financial, 3883 Telegraph Road in Suite 204, has had more than 5,000 Detroit Three retirees and former employees as clients.

Thurman said the company will try and meet with each of its clients and use its “fairness calculator” to make sure the lump-sum offer is fair to the employee, and discuss what the best option is for their particular circumstances.

In February, GM announced also announced it would eliminate traditional pensions for its 26,000 current salaried U.S. workers. The changes included terminating all traditional pensions and moving to a 401(k)-type retirement fund, an extra week of vacation time and performance-based bonuses instead of "across the board pay raises."