GM to Freeze Salaried Workers' Pensions to Cut Costs (Update3)
GM to Freeze Salaried Workers' Pensions to Cut Costs (Update3)
March 7 (Bloomberg) -- General Motors Corp., cutting costs after $8.55 billion in losses last year, will freeze the defined- benefit pension plans for its 36,000 salaried workers, joining Alcoa Inc. and Hewlett-Packard Co. in switching to a defined- contribution plan.
The change will save GM, the world's largest automaker, about $420 million on a pretax basis when it begins next year, and reduce the Detroit-based company's year-end 2006 pension liability by about $1.6 billion. GM will take a $120 million pretax charge related to the reduced pension liability.
GM Chief Executive Officer Rick Wagoner said in February that he will slash his own compensation in half and trim pay by 30 percent for his three top lieutenants. GM earlier won $1 billion in annual health-care cuts from union employees, part of a plan to restore profit by trimming $7 billion in yearly costs.
``This is a major cut, but it's also another shot over the union's bow to send a signal about getting future concessions in the next negotiations,'' said Burnham Securities Inc. analyst David Healy. GM plans to eliminate 30,000 union jobs and close nine manufacturing plants by 2008.
Employees hired before Jan. 1, 2001, will stop accruing benefits next year under their current plan and receive a modified benefit based on their average monthly base salary and future years of service.
Workers hired on or after that date will stop accruing credits under their plan and GM will contribute 4 percent of their annual base salary their 401(k) retirement account. GM said the additional 401(k) contributions for those employees will increase costs by about $15 million a year.
Union Workers Unaffected
The changes don't affect the benefits of current U.S. retirees, the vested benefits of former employees or unionized workers. Pension benefits earned prior to the transition will be preserved, GM said.
GM also agreed to match 50 percent of all salaried employees' 401(k) contribution up to 4 percent of their base salary starting next year. That change will increase pretax expenses by about $70 million annually, GM said in a statement. GM ended earlier this year its policy of matching 20 percent of contributions up to 6 percent of base salary, spokesman Robert Herta said.
IBM, Verizon, Sprint
In addition to Alcoa, Hewlett-Packard and GM, International Business Machines Corp., Verizon Communications Inc. and Sprint Nextel Corp. are among U.S. companies that have reduced pension liabilities in the last year by freezing defined-benefit plans. IBM said in January that the move will save it as much as $3 billion in the next four years and Verizon said it will save $3 billion over 10 years.
A defined-benefit plan guarantees a set monthly stipend upon retirement. These differ from a defined-contribution plan, such as a 401(k), which are funded by employer and employee contributions and grow until the account holder retires and begins withdrawals.
The Pension Benefit Guaranty Corp., which insures U.S. pensions, said in December that 9.4 percent of defined-benefit pension plans had been frozen as of 2003, the most recent year for which data was available. That represented 2.5 percent of all participants because most of the frozen plans were small, the PBGC said.
Frozen plans were more likely to be underfunded than non- frozen plans, according to the study. Half of frozen plans were less than 80 percent-funded on a current-liability basis compared with a third of non-frozen plans, PBGC said. GM's U.S. salaried and hourly pension plan was overfunded by $6 billion at the end of last year, GM spokesman Jerry Dubrowski said today.
Standard & Poor's said in December that companies in the S&P 500 Index have underfunded their health-care benefits and other retirement costs by about $292 billion. That's almost double the gap between future liabilities and money already set aside for pensions, the rating company said in a report.
Spending Reductions
Today's announcement follows earlier cost-cutting efforts at the automaker. GM said Feb. 7 it will cut pretax health-care expenses by about $900 million by capping salaried health-care coverage at 2006 levels for eligible GM salaried workers. GM salaried employees hired after Jan. 1, 1993, don't get retiree health care. GM also agreed to halve its $2-a-share annual dividend.
GM shares rose 36 cents to $20.17 at 2:33 p.m. in New York Stock Exchange composite trading. They have gained 3.9 percent this year after declining 52 percent in 2005.
Cutting salaried costs, pay and GM's dividend are strategies suggested Jan. 10 by Jerome York, who was appointed to the GM board last month. York, an aide to billionaire investor Kirk Kerkorian, has said additional cuts at the automaker will help get deeper concessions from union workers.
UAW
United Auto Workers President Ron Gettelfinger has said GM investors should help the automaker reduce costs. UAW spokesman Paul Krell said in January that the union agrees GM management and workers should sacrifice for the automaker.
York estimates GM's daily losses at $24 million and has said the company has enough cash to fund operations for about 1,000 days, assuming it gets about $11 billion through its plan to sell a 51 percent stake in the General Motors Acceptance Corp. finance unit.
Kerkorian, GM's fourth largest investor, holds a 9.9 percent stake in the automaker through his holding company, Tracinda Corp. York said Jan. 10 that Kerkorian may buy an additional 12 million GM shares if the automaker follows his recommendations.
To contact the reporter on this story: Jeff Green in Southfield, Michigan, at jgreen16@bloomberg.net
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