Detroit-based General Motors Co. will offer a lump-sum pension payment to 42,000 employees, while other employees will continue to receive monthly payments from an annuitized pension that Prudential Insurance Company of America will administer beginning in Jan. 2013, according to Dave Roman, director of financial communications for the company. The action is expected to reduce the company’s pension obligations by $26 billion.
Nearly 118,000 U.S. retirees will be affected by the changes depending on their retirement date and eligibility. According to a statement from the company, “GM plans to purchase a group annuity contract from Prudential under which Prudential will pay and administer future benefit payments to most of the remaining U.S. salaried retirees.” The company plans to complete the transaction with Prudential by the end of 2012 and Prudential would begin to administer the benefit payments in January 2013.
Of the 118,000 affected employees, the 42,000 that retired from GM on or after Oct. 1, 1997 and before Dec. 1, 2011 will have three choices; a one-time single lump-sum payment, continuing with the monthly payments that would be administered by Prudential, or a new form of a monthly benefit that would be a single life annuity or a joint or survivor monthly benefit that would also be managed by Prudential. Individuals that retired before Oct. 1, 1997 will continue to receive monthly payments though those will now be administered by Prudential. Active employees and retirees who began to receive pension benefits after Dec. 1, 2011, will be moved into a new GM pension plan with the same benefits.
Mike Hurst, director of investor relations for GM, explained in a phone interview, that the company will freeze its defined benefit plans beginning Sept. 30, 2012. He furthered that current employees or those who retired after Dec. 1, 2011 have had assets in the defined benefit plan and that the company will have to terminate that plan and move the assets into a the company’s 401(k) plan. Fidelity Investments currently manages the company’s 401(k) plan. According to the company’s latest 10-K filing it contributed $297 million to its 401(k) as of Dec. 31, 2011. Hurst furthered that the company does not work with a consultant and that the company does not plan on making any significant investment changes to the plans.
As detailed in the company’s 10-K filing, the defined benefit plan, of which the employees receiving a lump-sum or payments managed by Prudential are a part, had $94.3 billion in assets as of Dec. 31, 2011. The company’s benefit obligations as of the same time period were $108.5 billion. The plan’s expected rate of return is 8.48%. The asset allocations for the plan are 14% equity, 66% debt, 5% real estate and 15% other investments.
The 42,000 employees offered the lump-sum payment will have until July 20, 2012 to make a decision. The company also noted in a release that it expects to contribute between $3.5 billion to $4.5 billion to its defined benefit plan to improve its funding status. A final contribution amount will be determined before the end of the contract negotiations which, as previously noted, are expected to be finalized by the end of 2012.
According to Mercer media relations, the firm, along with Oliver Wyman had an advisory role in the transaction and was appointed by the independent fiduciary for the plan, State Street. Both Wyman and Mercer were appointed to work as insurance advisors for the transaction. Michael Moloney, who is a partner in the Americas insurance group of Oliver Wyman, told MMI that State Street’s role as an independent fiduciary was to pick the safest available provider for the annuitization of the plan and that Mercer and Wyman assisted with that decision. “The choice was driven by [Prudential’s] ability to do a transaction of this size. There was significant due diligence when picking a provider,” Moloney said.
A spokesman for Prudential explained that GM will purchase a customized buy-out contract that will be specifically tailored to meet GM’s needs. Media relations for Fidelity and State Street did not immediately return requests for comment.