GM offers lump sums, passes benefit payments to Prudential

DETROIT—In a move to “de-risk” its pension liabilities that is unprecedented in scope, General Motors Co. said Friday that it will terminate its pension plan for salaried employees and retirees and buy a group annuity policy from Prudential Insurance Co. of America to cover the promised benefits.

It also will give certain retirees—those who retired after Oct. 1, 1997, and before Dec. 1, 2011—a one-time opportunity to take a lump-sum benefit in place of their current monthly payment. In all, 42,000 plan participants will be offered that lump-sum option.

$26 billion reduction in pension obligations

Through its actions, GM said it expects a $26 billion reduction in its U.S. salaried pension obligations.

“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 going forward,” Dan Ammann, GM senior vp and chief financial officer, said in a statement.

The transaction is the largest if its kind, experts say.

“The combination of tactics and scale of planned actions are unprecedented in the U.S. private defined benefit pension market,” Matt Herrmann, St. Louis-based leader of Towers Watson & Co.'s retirement risk management group, said in a statement.

Earlier this year, Ford Motor Co. disclosed it would be offering salaried retirees a similar one-time lump-sum benefit option.

Benefit experts say there are several advantages to the arrangement and that other employers are likely to follow.

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“There could be some meaningful savings,” said Rick Jones, national practice leader-retirement plans for Aon Hewitt in Lincolnshire, Ill.

Through the plan termination, purchase of the group annuity and provision of lump-sum benefits to retirees choosing that option, GM—and other employers that follow—will save on costs such as premium payments to the Pension Benefit Guaranty Corp., as well as fees and costs associated with offering and administering their pension plans.

In addition, employers taking such actions no longer will be exposed to factors such as interest rate fluctuations and investment results that can cause big changes in their pension plans costs and contributions.

“Plan sponsors will gain certainty,” said Phil Waldeck, a senior vp in Hartford, Conn., with Prudential Retirement, a unit of Prudential Financial Inc.

As part of the transaction, GM will set up a new pension plan for current active employees, though participants will not accrue new benefits in that plan as part of an earlier action.