From the June 2012 issue of Treasury & Risk magazine

GM Cuts Pension Obligations

Automaker could inspire other companies with big pension plans.

The news General Motors is downsizing its pension obligations is likely to inspire similar moves by other companies, experts say.

“This is going to set off a trend that sees a lot of the other jumbo plans explore this option more fully,” says Ramy Tadros, partner and head of the Americas insurance practice at Oliver Wyman. “The key question is going to be around the capacity of the life insurance industry to bring enough capital into this to absorb those liabilities.”

“The economic rationale for corporate America to get out of the pension business is pretty compelling,” Tadros says. “We think this is going to set the scene for a lot of other corporate plan sponsors to ask the same question: ‘If we’re in the widget business, why do we have a big pension business that’s not core for us.’”

GM says it will reduce its pension liabilities by $26 billion by offering lump-sum buyouts to some salaried retirees and providing others with monthly payments via a group annuity from Prudential. In March, Ford said it will offer lump-sum buyouts to retirees and former employees not yet retired.

These moves come as the markets continue to erode plan funding. Mercer estimates that at the end of May, S&P 1500 companies’ plans had an aggregate funded ratio of just 76%.

Which plan sponsors are likely to follow GM’s example? Those “that have pensions that are outsized relative to the size of the business,” says Scott Campion, a senior manager at Oliver Wyman. “And better-funded pension plans are easier to terminate than worse-funded plans.”

Plans with a higher proportion of retirees to active employees are better candidates because insurers would charge more for a group annuity for a plan with a lot of active or terminated vested employees, Campion says.

 

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