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GM and Ford Offer Retirees Lump-Sum Pension Payments

Auto company retirees have important investment decisions to make as they consider special pension buy-out programs to be had by both General Motors ("GM") and Ford Motor Company ("Ford"). As the unprecedented lump-sum buy-out offers can assist the car makers as to what Ford describes as a "long-term strategy to de-risk its global funded pension plans," the experience will transfer the potential risk of managing pension funds from these Fortune 10 employers to the hands in the pensioners themselves.

The typical Motors Type of pension

GM promises to eliminate traditional pension plans for those current salaried employees by the end of 2012, in line with the Wall Street Journal.

The giant auto maker has taken two unusual steps to take down pension costs. First, GM is offering lump-sum cash payments to 42,000 eligible salaried retirees who receive monthly pension checks. Not all salaried retirees qualify for the lump-sum offer.

Second, GM is outsourcing pension administration for the next 76,000 U.S. salaried retirees. Prudential Financial Inc. will administer the brand new GM die altersvorsorgepflicht, which can be being funded via a group annuity contract. Pension payments to those GM retirees, who are not supposed to change in terms of monthly benefits, will start in 2013 beneath the new plan. Unlike the lump-sum buyout, annuitizing the plan through Prudential doesn't need approval through the individual plan participants.

GM is required to pay between $3.5 and $4.5 billion being a cash contribution towards the U.S. salaried pension plans as a way to choose the annuity and increase pension plan funding levels. This action does not impact GM's obligations for other benefits, including retiree medical care, life insurance coverage and vehicle discounts.

The Ford Plan

Ford is providing 90,000 U.S. salaried retirees and U.S. salaried former employees the opportunity to voluntarily accept a lump-sum payment of their pension assets. Ford will essentially settle their pension obligations to the people retirees who choose to take the offer. Payouts, that may begin later in 2010, is going to be paid from existing pension fund assets. This offers are similar to the lump-sum pension payout option available to U.S. salaried future retirees as of July 1, 2012.

The Retiree Dilemma

Fitch Ratings, according to a June 2012 press release, expects that "companies with both significant pension obligations and considerable cash might consider adopting a brand new strategy so that you can reduce their experience of plan volatility. Massive pension liabilities have been constraining large companies for a long time... and remain a significant concern for investors."

As private and non-private employers make a plan to limit their contact with pension liabilities, more responsibility for retirement planning has been moved to the person retiree. Economic pressures in the present uncertain job environment may force some retirees to redirect large cash pension payouts to the demands of day to day living, even for early withdrawal penalties.

Retiree medical benefits remain a significant section of risk kind of and public retirees also. Unlike pension obligations, which carry specific advance funding requirements, retiree medical benefits are funded with a pay-as-you-go system and never automatically vest. In way too many cases, the well-intended promises of retiree medical care have zero budgets. Employers are decreasing retiree medical subsidies in addition to expanding cash strategy efforts, in accordance with a 2011 Aon Hewitt survey of 500 employers.

In Summary

The GM and Ford moves are significant due to the auto makers' role as leading U.S. employers, plus the magnitude with their efforts to transfer pension risks off their balance sheets. GM promises to settle as much as $26 billion in pension obligations, with Ford following at around $18 billion.