GM group annuity purchase could be model for other firms

Other employers are likely to follow the path that General Motors Co. is blazing by purchasing a group annuity to help shed $26 billion in pension liabilities, benefit experts say.

Under its two-part strategy, GM has signed a contract to purchase a group annuity from Prudential Insurance Co. of America that will replace benefits that longtime retirees—salaried employees who retired before Oct. 1, 1997—received from GM.

Under the second part, some 42,000 salaried employees who retired after Oct. 1, 1997, but before Dec. 1, 2011, have until late July to decide whether to take a lump sum benefit or continue receiving their monthly payment. Those who continue monthly payments, though, will receive them from Prudential rather than from GM's pension plan.

The lump sum approach that is part of the what GM Senior Vp and Chief Financial Officer Dan Ammann described as the automaker's “de-risking strategy” is similar to a plan that Ford Motor Co. announced in May in which Ford is offering salaried retirees a one-time opportunity to convert their monthly annuity into a lump-sum benefit.

In the case of GM, most salaried employees and retirees who receive benefits on or after Dec. 1, 2011, will be moved into a new pension plan with the benefits they have earned in the current plan, which GM will terminate.

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They will have a choice of taking their pension, which will not earn additional credits, as a lump-sum or as a monthly annuity. The monthly annuity will be paid by the new GM pension plan, not by Prudential, as will be the case with other salaried retirees.

“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,” Mr. Ammann said in a statement.

“It allows us to focus more on our core business, which is building cars and trucks,” he said during a briefing about another advantage of shedding the salaried retiree pension obligations.

However, those advantages—removing a $26 billion liability from GM's balance sheet, transferring benefits administration to Prudential as well as no longer paying premiums to the Pension Benefit Guaranty Corp. for individuals no longer covered by the plan—will come at a price.

GM disclosed it will have to spend $3.5 billion to $4.5 billion on the transaction, which includes boosting funding of the pension plan and buying the group annuity. The salaried pension plan currently is 92% funded.

While GM is not the first company to transfer pension obligations through buying a group annuity from an insurer, it is the largest of its kind.

“The magnitude of the transaction is without precedent,” said Rick Jones, national practice leader-retirement plans for Aon Hewitt in Lincolnshire, Ill.

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Indeed, according to Aon Hewitt, pension liabilities annuitized in recent years have not exceeded $1 billion per year, and no single annuity transaction topped $1 billion since the 1980s. By contrast, GM is expected to annuitize a significant portion of the $26 billion through the transaction.

The size of this deal and GM's name recognition will be a catalyst for more transactions, experts say.

“We think that this deal...could open the floodgates for similar deals,” said Scott Campion, a senior manager in the Americas insurance practice at Oliver Wyman in New York.

Oliver Wyman and sister company Mercer L.L.C., both operating companies of Marsh & McLennan Cos. Inc., were selected by State Street Bank & Trust Co., the plan's independent fiduciary, to act as its insurance adviser for the transaction.

“The level of employer interest is extremely high,” said Phil Waldeck, senior vp in Hartford, Conn., with Prudential Retirement, a unit of Prudential Financial Inc.

Experts say risk transfer arrangements will have the greatest appeal to employers whose pension plan obligations are high relative to corporate size.

“Pension de-risking will be appealing to any plan sponsor with a large pension relative to their market cap. In particular, annuity transactions can make the most sense for plans that are frozen and have a high proportion of retirees as opposed to active participants,” Mr. Campion said.

While interest may be high, employers will not rush into risk transfer arrangements, as companies carefully analyze these arrangements, some say.

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“Employers do not make abrupt pension plan decisions,” Mr. Waldeck said.

“You will not see a major trend this year, but you will see more companies do this down the road,” Mr. Archer said.

The risk transfer has several key advantages, benefit experts note. Through the arrangement, employers transfer to another party—the annuity insurer—risks that are at the core of any defined benefit plan, said Mike Archer, a senior retirement consultant with Towers Watson & Co. in Parsippany, N.J.

Those risks include retirees living longer than expected, which would force bigger-than-expected pension plan contributions, Mr. Archer said.

There also is the risk of investments performing poorly or interest rates remaining low, which also could require additional plan contributions, he said.

In short, “You remove volatility and gain certainty,” Mr. Jones said.

“Shedding pension risk allows management to focus on their core business,” Mr. Campion said.

“You are offloading administration to others,” Mr. Jones said.

Still, there is a potential downside to the approach. The amount that GM will have to pour into its salaried pension plan before Prudential takes on the risk, as well as the cost of the annuity, will tap funds that could have been used elsewhere.

The question that companies weighing a pension risk-transfer approach will be asking is what will be the best use of their cash, Prudential's Mr. Waldeck said.