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
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
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
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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