General Motors Co., the largest U.S. automaker, said it expects to cut its pension obligation by $26 billion by offering lump-sum payments to about 42,000 retirees and shifting its plans to a unit of Prudential Financial Inc.
“These actions represent a major step toward our objective of de-risking our pension plans and will further strengthen our balance sheet and give us more financial flexibility,” Dan Ammann, GM’s chief financial officer, said today in a statement.
GM said the moves, which follow Ford Motor Co.’s announcement that it plans to offer lump-sum buyouts, will lead to special charges worth $2.5 billion to $3.5 billion in the second half. The Detroit-based company projects future pension income to be reduced by $200 million annually.
GM’s global pension plans were underfunded by $25.4 billion at the end of 2011, up from $22.2 billion at the end of 2010, according to federal filings. Analysts with credit-rating companies Moody’s Investors Service and Fitch Ratings have said they will evaluate how GM addresses that shortfall as they consider restoring an investment-grade credit rating.
Ford also is offering lump-sum pension payments to about 98,000 U.S. salaried retirees and former employees. The voluntary program is aimed at lowering the company’s $74 billion global pension liability, which was underfunded by $15.4 billion at the end of last year. Ford has not said how much its program may reduce its pension obligation.
GM rose 0.2 percent at 1:55 p.m. The shares had risen as much as 5.1 percent, reversing losses from earlier in the day when it reported an 11 percent increase in U.S. vehicle sales in May. The average of 10 analysts’ estimates was for a 17 percent gain. The shares gained 9.5 percent this year before today.
Assuming pension risk from employers may provide “a big opportunity to deploy a lot of capital,” Prudential Vice Chairman Mark Grier said at a May 22 presentation.
The Newark, New Jersey-based life insurer is focusing on retirement services in the U.S. and Japan after exiting its real-estate relocation and commodities businesses.
Prudential, the second-largest U.S. life insurer, last year sold protection to Goldman Sachs Group Inc. against the risk that longer life spans could lead to larger-than-expected pension obligations. The deal covers pension account values of about $160 million at Goldman Sachs’s U.K.-based Rothesay Life, Prudential said last year.
“Pension-plan sponsors are facing increasing regulatory and financial challenges,” Charles Lowrey, chief operating officer for Prudential in the U.S., said May 22. “And their response is that they’re seeking innovative asset-management solutions.”
Life insurers pay more in claims costs when death rates rise. They find the pension business attractive because the risk is the opposite, that clients will live longer than expected, Lowrey said.
Pension transfers involve “longevity risk, which is a natural hedge to the mortality risk of our insurance product,” he said. “This really is a good fit for us.”
For a story about Ford’s announcement of pension buyouts, see Ford’s Innovative Pension Play.