AUSWR
The Association of U S West Retirees
 

 

 

GM Details Pension Changes
The WALL STREET JOURNAL
Tuesday,
March 7, 2006

General Motors Corp. announced Tuesday modifications to its pension and other benefits for U.S. salaried employees, as the world's largest auto maker tries to shore up its finances.

The company, which suffered huge losses last year and saw its debt rating lowered to "junk," said in February it was planning to "substantially alter" pension benefits for salaried workers to "reduce the financial risks to GM."

The Detroit auto maker said Tuesday that as of Jan. 1, 2007, it will freeze the accrued pension benefits for U.S. salaried employees under their "defined-benefit" plans -- a type of pension that promises a monthly check based on years of service and wages -- and begin the shift toward a broader reliance on so-called defined-contribution plans, where more of the financial risk is borne by workers.

Salaried GM employees who were hired on or after Jan. 1, 2001, will move exclusively to a defined-contribution plan for future service.  Salaried employees hired before that date will remain in the defined-benefit plan, but they will receive a reduced retirement benefit for future accruals under a new "career average pay formula."  Pension benefits earned prior to the transition date will be preserved, the company said.

GM also said the changes don't affect the benefits of current U.S. salaried retirees.  Earlier cost-saving action already has capped retiree health-care benefits.

In connection with the latest changes, GM said it expects the pretax expense for its pension plan to be reduced by approximately $420 million in 2007.  It also projected that its year-end 2006 pension liability will drop by about $1.6 billion, but that it will likely record a pretax charge of $120 million tied to a reassessment of its long-term liability.  Also, beefed-up contributions to employees' 401(k) plans will add about $85 million in annual expenses.

"Global competition is truly changing the auto industry, and we must restructure ourselves to compete successfully in it," GM Chief Executive Rick Wagoner said in a prepared statement.  "In many cases, our non-U.S. based competitors do not have comparable legacy costs, because retirement benefits for employees and retirees in their home countries are more heavily government funded."

GM is working feverishly to cut costs after its world-wide auto business posted a loss of $11.4 billion last year.  It has slashed its dividend and announced numerous plant closings, and is pressuring its unionized work force to grant further concessions.  GM has lost U.S. market share to Japanese auto makers, which it says have a competitive advantage due to lower personnel costs.

Two trends have emerged in the broad shift away from traditional pensions.  Financially strapped companies such as airlines and auto makers are garnering much of the attention as they seek to ditch their badly underfunded pension liabilities and try to stay afloat.  Meanwhile, relatively healthy companies -- many with fully paid-up pension plans -- are seeking to shift to retirement programs that put more of the burden for savings and planning on employees

Earlier this year, International Business Machines Corp. told 117,000 workers in U.S. defined-benefit pension plans that they will stop earning additional benefits after 2007, saving the company more than $2.5 billion over five years.  And in December, Verizon Communications Inc. announced it was freezing the pensions of 50,500 managers, saving $3 billion in the coming decade.

Under accounting rules, companies calculate how much they expect to pay out in pensions over the lives of their employees, including amounts workers haven't earned yet, and then reflect that amount as a liability on their books.

When a company freezes its pension -- halting the buildup of additional benefits for employees -- it is no longer obligated to make some of the payments it had planned.  That allows the company to reduce the value of the liability it was carrying on its books, which generates accounting gains that are counted as income.  Although this "income" isn't money that can be spent, it can affect the stock price and often management's pay incentives.

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