GM could offer pension buyouts to hourly retirees
June 4, 2012
Analyst: GM could offer pension buyouts to hourly retirees
By DAVID SHEPARDSON
/ Detroit News Washington Bureau
Washington —Chrysler Group LLC said Monday it has no plans to follow the decisions of rivals General Motors Co. and Ford Motor Co. to offer pension buyouts to salaried workers.
Chrysler CEO Sergio Marchionne made the remarks to reporters in Austin, Texas, on Monday. “There’s no need for us to do that,” Marchionne said, according to Dow Jones Newswires. “Not at all.”
A Chrysler spokesman confirmed the comments.
GM’s decision to cut its pension obligations by more than 20 percent may set the stage for a similar offer to the automaker’s nearly 500,000 hourly pension participants and could prod Ford to turn over some of its pension plans to an outside firm, analysts said.
Investors didn’t like GM’s pension move, sending the Detroit automaker’s stock down Monday to a 52-week-low to $21.11, down 90 cents, or 4.1 percent, in heavy trading. At least one analyst cut its price target on GM.
On Friday, GM said it was cutting its $134 billion pension liability by $26 billion by offering pension buyouts to 42,000 salaried retirees and offloading the rest of its salaried pension plans for retirees to Prudential Insurance.
UBS Securities analyst Colin Langan said in a note Monday that it doubts “this creates value for shareholders” and said GM may have overpaid. It reduced its price target on GM from $32 to $30, on the premium that GM paid to Prudential. “We believe funding pensions would more adequately address pension risk,” Langan wrote.
GM’s $26 billion salaried pension plans were underfunded by $1 billion. GM will buy an annuity paying $3 billion above its $26 billion liability.
“We view this as a substantial step forward in strategic derisking by reducing potential future plan volatility,” Barclays Capital auto analyst Brian Johnson wrote in a research note on Monday.
GM will retain its pension plan for its current salaried workers and will retain $10 billion in liabilities.
“However, GM still needs to address unionized retirees,” Johnson wrote.
GM will still have $81 billion of U.S. pension liability — including $71 billion in its hourly plans — and a $12 billion underfunding gap.
“We believe there is some possibility that GM will work with the UAW for a similar offer for union retirees,” Johnson wrote.
UAW President Bob King did not return a phone message Friday. GM declined to say Friday if it needs the UAW’s permission to offer buyouts to workers or to off-load pensions.
“We believe that roughly $55 billion of the $71 billion hourly plan liability is for retirees. Assuming the same premium, GM would need to pay an about $6 billion premium, and doing so would reduce the gross liability to $26 billion,” he wrote.
Some investors may question the use of the cash, but “longer-term investors may appreciate the lower plan volatility provided through derisking.”
Morgan Stanley auto analyst Adam Jonas said in a note Monday that GM’s action is “unprecedented.”
“The move helps significantly reduce economic volatility, improves valuation transparency and enables GM to focus more on making cars rather than managing a pension fund. This development is a big win for GM management,” Jonas said. “The team is doing what they say they will do and making swift progress on many fronts.”
He said the firm had expected to pay 120 percent of liabilities — and GM only paid 110 percent.
Jonas also noted that Ford Motor Co.’s salaried buyout offer did not include turning over pensions to an outside company.
“We expect the Ford team is watching with interest what GM has accomplished and can come back with similar offers to new tranches of its pension population,” he wrote.
Moody’s Investors Service said Friday that GM’s pension move “will have no impact” on GM’s credit rating and won’t speed its efforts to win investment-grade status.
GM’s pension plans underfunding grew worldwide from $22.2 billion underfunded to $25.4 billion, including its U.S. plans, which saw its underfunding increase from $11.5 billion to $13.3 billion. The company has the world’s largest pension plans with nearly $110 billion in assets.
Salaried retirees eligible for the lump-sum payment will have until July 20 to make a decision on their payment options. They will receive the lump sump in September.
GM earned 8 percent on its pension investments in 2011, and expects to earn 6.5 percent for its hourly pension plan and 5.7 percent for the salary pension plan.
GM said its pension income will decline by an estimated $800 million in 2012, because of the reduced expected rate of return on plan assets of $1.4 billion, which is partially offset by reducing pension expenses by $600 million — primarily interest cost.
GM said earlier it is freezing its salaried pension plan, which will mean salaried workers will stop accruing additional pension benefits after Sept. 30. Active plan participants will receive additional contributions to its 401(k)-style plan and an extra week of vacation.
That change affects 19,000 GM salaried employees hired before 2001 who still receive traditional pensions, which provide retirees with a fixed amount of money each month for the rest of their lives.
As part of its new contract with the United Auto Workers union reached last year, it barred new hourly workers from receiving defined benefit pensions.
But the UAW said that GM had sought cuts in hourly pensions for older workers, and the union rejected that. GM CFO Dan Ammann said Friday the automaker continues to talk with the UAW about pensions.
GM froze its cash balance pension plan for entry-level employees on Jan. 2, and expects to terminate it in June. Participants in the plan and all employees hired after October 2007 will participate in a defined contribution plan, GM said.
GM’s U.S. pension plans have 14 percent of assets in stocks, down from 29 percent a year earlier. It reduced its real estate holdings from 8 to 5 percent. It has upped its investments in debt instruments from 41 percent to 66 percent.
GM made $2.7 billion in contributions to its pension plans in 2011, including 61 million shares of GM stock.