General Motors will be cutting back its pension payments by $26 billion, by offering its salaried retired employees a lump sum payment and switching to Prudential Financial Inc. to handle their retirement accounts, according to Bloomberg News. GM says the move is an effort to curb the high costs of their pension program and help balance their books.
"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," GM finance chief Dan Ammann said in a statement. Retirees will see no changes in their pension payments under the new system, he added.
This is under regulatory review, according to Wall Street Journal. There are a number of benefits for the workers today there, being that an outside source will be better able to protect the retirement funds. Retired employees that take this pension scheme will have to manage their funds correctly, or there might not be enough to last through their retirement. The new plan would also remove GM’s responsibility to pay the beneficiaries of those who had the pensions.
According to Business Week, “...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.” Business Week continued to explain that more life insurance companies are moving towards the retirement fund investment to hedge the expense of people living longer lives now, “Life insurers pay more in claims costs when death rates rise.”
The move was based of projected revenue for their pension payments and collected income.
“GM said its pension income will decline by an estimated $800 million in 2012, due to the reduced expected rate of return on plan assets of $1.4 billion, which is partially offset by reducing pension expenses by $600 million — primarily interest cost," cites The Detroit News.
Being that the Worker's Union refused to work with GM on working out a deal on reducing the pension plan finances, GM was left to find another means. This is also what has likely happened with Ford. Ford will also be doing a similar program to keep their pension program solvent. If you remember, Ford was the only American automaker that refused to take any bailouts, but they also managed to get their union to work with them. That relationship may have reached its limit and now Ford is having to scramble, just like GM, to salvage their program.
“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," reports The San Francisco Chronicle.