General Motors (GM) is offering retiree Rick Knoth a check for more than a half-million dollars and he’s still unhappy. Yes, Knoth plans to take GM’s huge buyout of his retirement benefits, but says he may never buy another car from the company where he worked for 37 years. “During my career I was told I was a valuable member of the GM family,” says Knoth, 60, who retired in 2008 as a manufacturing engineer. “Now they’re saying … ‘Here’s your check, go away.’”
GM and rival Ford Motor (F), rebounding from their near-death experiences during the financial crisis, are eager to rid their balance sheets of the huge pension obligations that Wall Street views as onerous debts weighing on their credit ratings and stock prices. So this spring they came up with an ambitious solution: buy out the lifetime pension payments due 140,000 salaried retirees. With both carmakers suddenly flush with profits—GM and Ford made $9.2 billion and $20.2 billion, respectively, in 2011—it seems like a smart way to remove decades of uncertainty from their finances. Yet because the buyouts are based on actuarial assumptions about what each retiree’s pension stream is worth using IRS projections about inflation, many ex-employees worry they may outlive their payments.
GM says its $134 billion pension obligation is the largest of any company worldwide and was underfunded by $25.4 billion at the end of 2011. Ford’s $74 billion pension liability was underfunded by $15.4 billion at the end of last year. The plans are a huge drain: Ford this year is pumping $3.5 billion into its pensions and won’t catch up until at least mid-decade. And because pension funds are invested in securities, their values can rise or fall unexpectedly. Buyouts would remove some volatility and liabilities from automakers’ books.
GM is offering buyouts to 42,000 pensioners, or about 36 percent of its salaried retirees, who left from Oct. 1, 1997, to Dec. 1, 2011. Those who refuse the lump-sum buyouts will find their pension plan shifted to a unit of Prudential Financial (PRU) along with those of other retired U.S. salaried workers. GM will spend $3.5 billion to $4.5 billion to create a group annuity at Prudential and to offer the buyouts. The moves will excise its 118,000 salaried retirees from its books, though the company will continue to cover the pensions of about 400,000 hourly retirees. GM says the lump-sum payments and annuity will together cut $26 billion from its pension load.
“The market is willing to give a very positive reaction to pension-risk reduction,” says Mick Moloney, a partner in the insurance practice of consultant Oliver Wyman, which advised GM on its plan. “As soon as the press release came out, the share price went up,” he says. Some retirees, though, feel betrayed. “GM is simply abdicating its promise to salaried retirees for a lifetime pension to balance the books by unloading the obligation,” Jim Shepherd, president of the GM Retirees Association, said in a June 21 letter to a GM executive. “They’re throwing everybody under the bus,” says Vern Henderson, 79, a 1987 GM retiree not offered the buyout. “They’re targeting people who are the biggest liability to General Motors because they’ll live longer.” (GM says it will still offer retirees life-insurance benefits, discounts on cars, and regular updates on its business plans.)
GM retirees have until July 20 to accept buyouts. A 65-year-old receiving a $3,000 monthly pension check would be offered a buyout of about $500,000, according to Leon LaBrecque, a financial planner in Troy, Mich., who’s advising several of the carmaker’s pensioners. Some offers are worth almost $1 million, he says. Those who reject the buyout will start receiving monthly pension checks from the Prudential annuity which GM says it’s overfunding by $1 billion to assure its adequacy. Unlike GM’s pension checks, payments from the annuity will not be backstopped by the government’s Pension Benefit Guaranty Corp.
“We’re funding the plan transferred to Prudential at 110 percent [of current liabilities], and then we’ll never have to address it again,” Dan Ammann, GM’s chief financial officer, said on a call with analysts on June 1. “One way or another, we know that we will move the entire $26 billion off of our balance sheet.”
Ford’s 98,000 salaried retirees will have longer to weigh options. They’ll start receiving offers in August and have 90 days to make a decision. Ford will roll out the offers over the next year and provide independent financial counseling. Retirees who turn down the buyout will continue to get monthly pension checks from the company. “Ours is completely voluntary; theirs [GM’s] is a different approach,” says Bob Shanks, Ford’s CFO. The decision depends on “how risk averse is an individual. I’m not suggesting this is a risky venture, but it depends on your point of view,” Shanks says. “By not taking a lump sum, you’re assuming and depending on Ford continuing as an ongoing operation for the balance of your lifetime.”
LaBrecque says the calculation on whether to take the buyout comes down to how long a retiree thinks he or she will live. Surviving spouses get 65 percent of GM’s monthly pension and can be better off with the lump sum, he says. LaBrecque advises retirees who’ve had serious health problems to consider the buyout because the payoff will be better for their families should they die soon. “I have one GM retiree who received an $850,000 lump-sum offer who is recovering from cancer,” LaBrecque says. “I’m like, ‘Take the $850,000, dude.’”
Photograph by Daniel Shea for Bloomberg Businessweek
It’s a less clear decision for younger retirees in good health. “My mom and dad lived into their early 80s, so I’m not going to be ready to hang it up for a while,” says Dave Schoenherr, 65, who retired from Ford in 2001 as a quality review engineer. “What if I live another 20 years and the money runs out? The monthly check never runs out.”
That’s a big worry for Patricia Roberts, 63, who retired from GM in 2006 as a general director overseeing an initiative to increase the number of female car dealers. She says she already lost two-thirds of her executive pension in GM’s 2009 bankruptcy. And now she figures her buyout offer would last only 12 years if she made monthly withdrawals equal to her current monthly pension checks. She hasn’t decided whether to take the buyout or the annuity from Prudential, but neither will match the retirement income she once expected. “I lived my whole life there, I grew up there, and this is a real betrayal,” says Roberts, who was hired at 18 and earned two college degrees while climbing the ladder. “You can’t promise something and not deliver.”
Moloney says the decisions by GM and Ford retirees will be watched closely by other companies looking to cut their pension liabilities. Just 35 percent of the 200 largest U.S. companies offered traditional pensions last year, down from 54 percent in 2006, according to human resources consultant Mercer. Such plans at companies in the Standard & Poor’s 1500 index were about 82 percent funded as of March, according to Mercer.
Moloney says GM is a model for how to offload a pension plan to an insurance or money management firm. He expects annuity deals will increase at least tenfold, from about $1 billion a year now to $10 billion to $20 billion during the next five years.