June 2 (Bloomberg) -- General Motors Co., the largest U.S. automaker, said it aims to cut its pension obligation by almost a fifth by offering lump-sum payments to about 42,000 salaried retirees and shifting plans to a Prudential Financial Inc. unit.
The moves, which follow Ford Motor Co.’s planned offer of lump-sum buyouts, will eliminate about $26 billion from GM’s pension obligations, which totaled $134 billion at the end of last year. The offers are a first for Detroit-based GM, which projects a second-half expense of $2.5 billion to $3.5 billion and a $200 million decrease in annual pension income.
“When you’re in the pension business in a big way, you’re subject to enormous volatility from a number of uncontrollable factors,” Chief Financial Officer Dan Ammann told analysts on a conference call yesterday. “This is about a fundamental risk reduction to the enterprise, about lowering our cost of capital, about increasing our financial flexibility.”
For the pension and insurance industry, GM’s move opens new avenues of revenue as other companies may seek to offload their retiree obligations. GM said it has the largest pension obligation of any company. Negotiations on this deal began last year, said Phil Waldeck, Prudential’s senior vice president for pension and structured solutions.
“The size of the transaction alone makes it unique within corporate America and the pension industry,” insurance broker Aon Plc said in a statement on its website, which said no annuity transaction has exceeded $1 billion since the 1980s. “By contrast, GM is expected to annuitize a significant portion of the $26 billion in this single transaction.”
GM’s global pension plans were underfunded by $25.4 billion at the end of 2011, up from $22.2 billion a year earlier, according to federal filings. Analysts with credit-rating companies Moody’s Investors Service and Fitch Ratings have said they will evaluate how GM addresses that shortfall as they consider restoring an investment-grade credit rating.
Standard & Poor’s Ratings Service said the moves don’t affect GM’s credit ratings. Fitch characterized them as a positive.
The changes apply only to retired U.S. salaried employees, not former union workers or retirees in other countries.
“Pension has continued to be a significant issue for General Motors,” Ammann said yesterday on a conference call with reporters. “It’s important to us to mitigate the growth of these obligations and in the case of today’s actions, to actually reduce that obligation.”
GM will contribute $3.5 billion to $4.5 billion in cash to the salaried pension plans. The cash will purchase the group annuity contract from Prudential and add about $1 billion in funding to the pension plans, Ammann said. The transaction will be completed by the end of this year, he said.
“While the proposed action would have upfront and ongoing costs, it should materially lower the automaker’s pension benefit obligations and narrow its unfunded pension obligations,” Efraim Levy, equity analyst with S&P Capital IQ, wrote in a note yesterday. Levy recommends buying the shares.
GM fell 0.9 percent to $22.01 yesterday in New York. The shares rose as much as 5.1 percent after the changes were announced, reversing losses from earlier in the day when it reported that U.S. vehicle sales rose less in May than analysts had estimated. The shares have gained 8.6 percent this year. Prudential shares fell 3.7 percent yesterday to $44.74. They have declined 11 percent this year.
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. Dearborn, Michigan-based Ford hasn’t said how much its program may reduce its pension obligation.
Ford fell 4.2 percent to $10.12 after its light-vehicle sales increase in May beat estimates by 1 percentage point.
Assuming pension risk from employers may provide “a big opportunity to deploy a lot of capital,” Prudential Vice Chairman Mark Grier said at a May 22 presentation.
The life insurer, based in Newark, New Jersey, is focusing on retirement services in the U.S. and Japan after exiting its real-estate relocation and commodities businesses.
“Since 2008, employers have been much more focused on pension-risk management,” Byron Beebe, U.S. retirement consulting market leader for the Aon Hewitt business, said in a statement. “We expect a continuation of pension settlement and de-risking activities.”
Prudential, the second-largest U.S. life insurer, last year sold protection to Goldman Sachs Group Inc. against the risk that longer life spans could lead to larger-than-expected pension obligations. The deal covers pension account values of about $160 million at Goldman Sachs’s U.K.-based Rothesay Life, Prudential said last year.
“Pension-plan sponsors are facing increasing regulatory and financial challenges,” Charles Lowrey, chief operating officer for Prudential in the U.S., said May 22. “And their response is that they’re seeking innovative asset-management solutions.”
Life insurers pay more in claims costs when death rates rise. They find the pension business attractive because the risk is the opposite, that clients will live longer than expected, Lowrey said.
“Our core business is designing, building and selling cars,” GM’s Ammann said. “Prudential’s core business is taking pension risk and managing that. This is really a move for us to further refocus on our core business and get out of a non-core business.”
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