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GM and Ford Offer Retirees Lump-Sum Pension Payments

Auto company retirees have important investment decisions to create because they consider special pension buy-out programs offered by both Automobile ("GM") and Ford Motor Company ("Ford"). While the unprecedented lump-sum buy-out offers helps the auto makers of what Ford describes being a "long-term technique to de-risk its global funded pension plans," the experience will transfer potential risk of managing pension funds readily available Fortune 10 employers in to the hands with the pensioners themselves.

The typical Motors Monthly pension

GM intends 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 is taken two unusual steps to bring down pension costs. First, GM can give lump-sum cash payments to 42,000 eligible salaried retirees who receive monthly pension checks. Don't assume all salaried retirees meet the requirements to the lump-sum offer.

Second, GM is outsourcing pension administration for an additional pair 76,000 U.S. salaried retirees. Prudential Financial Inc. will administer the modern GM Altersvorsorgepflicht, which can be being funded through a group annuity contract. Pension payments to those GM retirees, who are not expected to difference in relation to its monthly benefits, will begin in 2013 within the new plan. Unlike the lump-sum buyout, annuitizing the plan through Prudential doesn't require approval from the individual plan participants.

GM is anticipated to spend between $3.5 and $4.5 billion as being a cash contribution towards the U.S. salaried pension plans in order to purchase the annuity and increase retirement living funding levels. This course of action doesn't impact GM's obligations for other benefits, including retiree healthcare, insurance coverage and vehicle discounts.

The Ford Plan

Ford is providing 90,000 U.S. salaried retirees and U.S. salaried former employees the ability to voluntarily accept a lump-sum payment of these pension assets. Ford will essentially settle their pension obligations to the people retirees they like to simply accept the offer. Payouts, which will begin later this season, will likely be paid from existing pension fund assets. This offers are similar to the lump-sum pension payout option offered to U.S. salaried future retirees as of July 1, 2012.

The Retiree Dilemma

Fitch Ratings, as outlined by a June 2012 press release, expects that "companies with both significant pension obligations and considerable cash might consider adopting a new strategy so that you can reduce their experience plan volatility. Massive pension liabilities are already constraining large companies for many years... and turn into an important concern for investors."

As private and non-private employers take steps to limit their experience pension liabilities, more responsibility for retirement planning will be moved to the consumer retiree. Economic pressures in the current uncertain job environment may force some retirees to redirect large cash pension payouts on the demands of daily life, even at a cost of early withdrawal penalties.

Retiree medical benefits remain an important division of risk kind of and public retirees also. Unlike pension obligations, which carry specific advance funding requirements, retiree medical care benefits are funded over a pay-as-you-go system and never automatically vest. In lots of cases, the well-intended promises of retiree health care don't have any financial resources. Employers are decreasing retiree medical subsidies along with expanding cash strategy efforts, based on a 2011 Aon Hewitt survey of 500 employers.

To conclude

The GM and Ford moves are significant due to the auto makers' role as leading U.S. employers, along with the magnitude of these efforts to transfer pension risks business balance sheets. GM offers to settle approximately $26 billion in pension obligations, with Ford following at approximately $18 billion.