After General Motors made a deal with Prudential Financial to cut pension obligations by $26 billion, more and more companies are thinking to do the same – as US firms face a retirement funding shortfall the size of Greece’s debt.
Bloomberg reports that pension liabilities exceed assets by more than $435 billion!
Companies that endured two stock market crashes in a decade and 10-year Treasury yields near a record low may be tempted to follow GM’s model by paying insurers to take the risk that market returns are inadequate or that beneficiaries live longer than expected.
GM – Prudential Financial Deal
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 noted that no annuity transaction has exceeded $1 billion since the 1980s.
The transactions are expected to be completed by the end of 2012, following completion of regulatory review. Prudential would then assume responsibility for the benefits covered by the agreement and begin making the benefit payments in January 2013.
Approximately 118,000 U.S. salaried retirees are impacted by these changes in different ways, depending on retirement date and eligibility. Salaried retirees eligible for the lump-sum payment will have until July 20, 2012 to make a decision on their payment options.
GM noted that the pension changes do not affect its salaried retirees’ eligibility for post-retirement health care, life insurance and a vehicle discount.
Timken Co. (TKR) is among companies that may follow GM’s path. The maker of bearings has begun offering retiring employees the option of receiving benefits in a lump sum.