In a groundbreaking move to reduce Ford Motor's pensionobligations and related balance-sheet volatility, the company saidit will offer salaried retirees and former salaried employees lumpsums in lieu of future pension payments.

“This involves retirees in a plan that's not terminating,” saysMike Archer, leader of intellectual capital for the North Americanretirement practice of consultancy Towers Watson, pictured atright. “We're unaware of any other large plan that has done this.”Other organizations have offered lump sums to former employees whoare vested in the pension plan but not yet retired, he says.

Whittling down pension obligations will make it easier for Fordto manage them, Archer says. “The size of pension obligations thatthey have requires them to spend an awful lot of time managingthose obligations,” he says. “A strategy that helps Ford make theobligation smaller is one that long term will help them make thesuccess of the organization more fully dependent on how they do inthe core business than how they do in managing their pensionobligations.”

Ford plans to offer lump sums to 90,000 retirees and formeremployees, funding the payments from pension plan assets.“Individual offers will be made over time to accommodate the sizeand complexity of this program,” CFO Bob Shanks said during Ford'squarterly earnings conference call last week. “We would expect tocomplete the process sometime next year.”

At the end of 2011, Ford's U.S. pension plans, including thosefor salaried and hourly employees as well as unqualified plans, had$48.8 billion in obligations and $39.4 billion in assets, for anoverall funded ratio of 80.7%. Shanks said the U.S. salariedpension plan represents about a third of that $49 billion inobligations.

He noted that the company had already taken steps to improve itsrisk profile with regard to its pension obligations by announcingchanges earlier this year in how it manages plan assets. “But thisis a huge step forward, in terms of actually eliminating some ofthe obligation altogether,” Shanks said.

In response to a question about the discountrate Ford will use to compute the present value of the pensionpayments it has promised to retirees and former employees, Shankssaid the calculation will be done “person by person.

“It's done with actuarial data around each individual and howlong they might be expected to live,” he said. “It's not one rate,it will be thousands of rates.”

Given the “unprecedented nature” of the offer and the difficultyin knowing how many of those eligible will decide to take a lumpsum, Ford can't estimate what the impact will be on its pensionobligations, Shanks added.

Archer says that when pension plans give workers who areretiring a choice between a lump sum and an annuity, “it's notunusual to see 70%, 80%, in some cases even 90% of employees takelump sums.” But he says the take-up rate is likely to be loweramong retirees who are already receiving pension payments. Thelonger someone has been retired, “the more you may have come torely on the annuity stream you have,” he says.

Archer says he's seeing interest from other companies but addsthat the response Ford gets will affect how many companiesdecide to do something similar. “I think there will be at leastsome followers,” he says. “But the degree to which it becomes amajor trend depends on how successful it is for the first ones outof the gate.”

In 2010, Ford won a gold Alexander Hamilton Award for a previous phase of itsefforts to de-risk the pension plan.

For a different approach to containing pension risk taken bya North Carolina manufacturing company, see De-Risking Defined-Benefit Plans.