GM Pension Buyout Financial Engineering or Coup?

After the close of the stock market late Friday, General Motors announced that it would offer lump-sum buyouts to 42,000 retired salaried employees while 76,000 others would have their pensions transferred to The Prudential Insurance Company of America, which would take over the GM white-collar plan.

Active GM employees would not be affected, nor would UAW members, by the move that could result in a $26 billion balance sheet reduction of GM’s U.S. salaried pension debt. Overall, GM has pension liabilities of $134 billion with plan assets of $109 billion. These latest pension changes also do not affect GM salaried retirees’ eligibility for post-retirement health care, life insurance and a vehicle discount.

GM in an SEC filing said its anticipated cash contribution to its U.S. salaried pension plans to transfer the costs to Prudential will be $3.5 to $4.5 billion to help fund the purchase of a group annuity contract and to improve the status of the currently underfunded pension plan for active salaried employees. The final amount will be determined at the closing of the transactions, expected by the end of the year – if regulators approve the move.

GM expects to take net special charges in the range of $2.5 to $3.5 billion in the second half of 2012. The ongoing annual impact to earnings will be approximately -$200 million due to a decrease in pension income that will accrue to Prudential. While strengthening the balance sheet, the move only delays payment of dividends on GM common stock that has seen zero dividends paid since the reorganized company went public in November of 2010.

Ford Motor Company, which has almost $75 billion in pension liabilities, is also offering lump-sum pension payments to 98,000 U.S. salaried retirees and former employees. However, Ford is not shedding its pension plans because of apparent need to conserve cash to pay a newly resumed a dividend on its stock – important to the Ford family, which controls the company – as well as the need to invest in new products. Ford originally planned to work with GM together on the problem, but the two companies ended up taking different approaches.

Worldwide Ford has $15.4 billion in underfunded pension liabilities; including $9.4 billion in the U.S. Ford is in the process of closing many of its plans to new entrants and looking to move this huge liability off its balance sheet. Nevertheless, Ford says it will be years before its pension plans are fully funded.  (See Ford Moves to Decrease Its $15 Billion in Unfunded Pensions)

“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,” said Dan Ammann, GM senior vice president and CFO.

However, the stock market appeared unimpressed by the GM move, with GM stock closing on Monday at $21.11, down 90 cents or -4.09%. Ford Motor did slightly better closing a $10.04 a share, off 8 cents or -0.79%.

About Ken Zino

Ken Zino is an auto industry veteran with global experience in print and electronic media. He has auto testing, marketing, public relations and communications expertise garnered while working in Asia, Europe and the U.S.
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